Al Brooks see the possibility of a rally to all-time highs but expects correction to quickly follow.
The E-mini S&P 500 futures market might gap to a new all-time high on the this week, but the streak of nine consecutive bull bars on the daily chart that ended two weeks ago should lead to a pullback to 3200 starting within a couple weeks.
The monthly E-mini S&P 500 chart has another big bull bar so far in August (see below). However, because of the buy climax on the daily chart (see below), there is an increased chance of a selloff starting in the next few weeks. If it starts in August, this month’s candlestick could look very different once it closes.
The bulls have been in control for five months. They want August to close on the high of the month and above the July high. That would increase the chance of higher prices in September. But if August closes below the July high, traders will not expect September to be another strong bull bar.
If there is a big tail on top of this month’s candlestick, September will probably mostly overlap August. Also, there would be an increased chance that it would close below the open of the month. That would create the first bear bar in six months.
After five strong bull bars, traders will buy the first one- to two-month pullback. The bears will probably need at least a micro double top before they can retrace half of the five-month rally. Consequently, there is not much downside risk for a few months. If there is a sharp selloff in September, the selling would probably end in October. The E-mini has a good chance to end the year near the high, even if there is a pullback in September and October.
This is true regardless of the outcome of the upcoming U.S. Presidential election. Presidents are important in many ways, but the political party has no influence on the stock market. The economy is much bigger and much more powerful than whoever is sitting behind the desk in the Oval Office.
The E-mini futures again closed near its high on the weekly chart (see below). Four of the past seven weeks gapped up. While only one of the gaps stayed open, this is a sign of eager bulls.
With last week closing on the high and at a new all-time high, there is an increased chance of another gap up on Monday. If it is a big gap up, traders will wonder if it might be the start of a new bull trend to far above the three-year trading range.
Will it lead to a 1,000-point measured move up? That is unlikely, but since the market is overbought and the odds favor a pullback, the short side might be crowded. That always increases the chance of the opposite. Therefore, instead of a pullback for a few weeks, there could be a short squeeze up for a few weeks.
If the E-mini starts to go up, the shorts will buy back their shorts in a panic. Also, many bulls waiting to buy a pullback will be afraid there will be no pullback and they will buy in a panic as well. Consequently, there is an increased potential of a short squeeze this week in addition to an increased chance of several weeks of profit taking.
Buy climax so traders expect profit taking soon
The weekly chart has not had a pullback in eight weeks. An eight-week bull micro channel is a sign of strong bulls. They will probably buy the first two- to three-week pullback.
However, an eight-week micro channel is getting extreme. This is especially true when most of the weeks have had small bodies and prominent tails. A rally with bars that look like that typically soon evolves into a trading range. Also, a rally to an old high usually stalls for several bars. Traders should expect a two- to three-week pullback to begin soon. A trading range could develop and last through October.
How much of a pullback?
At a minimum, the E-mini will probably fall below the most recent major breakout point. That is the June 5 high of 3220.75. The 3200 Big Round Number is just below, and it is a magnet. Traders therefore should expect a test of 3200 in September.
Can the selloff reach the bottom of that June 5 week trading range? That trading range came late in a bull trend. It is therefore a reasonable candidate for a Final Bull Flag. The bottom of a Final flag is always a magnet.
There is currently a 40% chance of a pullback in the next two months to that level, which is around the 3,000 Big Round Number. If the E-mini pulls back to the 3200 breakout point, the odds of it continuing down to 3,000 will go up to 50%.
As mentioned above, the E-mini futures had a streak of nine consecutive bull bars on its daily chart broken last week. A streak of that length comes every couple years. It is a buy climax and traders should expect profit taking to begin within a couple weeks.
There was a streak of eight consecutive bull bars in June. The E-mini fell 9% over the next five days.
The most recent streak with nine bars was in January 2018. That rally was stronger than the current rally, and there were two more brief legs up after the first bear body. This formed a parabolic wedge buy climax. The E-mini then reversed down 10% over the next few weeks. It fell below the bottom of the nine-bull bars.
How much higher can the E-mini go at this point? Since the nine bars were not especially strong, the E-mini will probably not go much higher before correcting. However, it could continue sideways for a week or two more before turning down.
What are the targets for the pullback?
One goal for the reversal down is to retrace the most recent buy climax. Traders therefore should expect a test down to the bottom of the nine consecutive bull bars. That it around 3200. If the E-mini dips below, traders will look at the next major higher low as another magnet. That is the bottom of the June trading range at around 3,000.
It is important to note that the pullback in June got near the breakout point of the April 29 high, but did not overlap. When there is a subsequent breakout, like in July, and then another pullback, that pullback typically falls below the breakout point. Here the major breakout point is the June 5 high of 3220.75. Traders should expect a test of 3200 before the E-mini goes much higher.
How to reconcile the strong weekly chart with the weak daily chart?
This is one of those situations where the unstoppable force of the weekly bull trend is hitting the immovable object of the buy climax streak on the daily chart. Which is more important? Streaks usually win over everything, but the trend often continues further than what seems likely before reversing. For example, in 2017, there were streaks on the daily, weekly, and monthly charts that were the most extreme in the 100-year history of the stock market, and then continued a long time before ending. They lead to the current three-year trading range.
Does the E-mini have to pull back after a streak? No, but it usually does, even if it continues up for a couple more weeks first. Remember, the weekly chart is unusually bullish, and it might gap up to a new all-time high next week.
While the weekly bulls want a 1,000-point measured move up based on the three-year trading range, there will probably be a pullback on the daily chart first. Also, the odds are that the three-year trading range will be a magnet for many years. This is true even if the E-mini rallies to 4,000 within a couple years.
On the daily chart, a gap up next week would be a breakout above a 50-point tall, eight-day tight trading range. Traders would expect some profit taking after reaching a measured move up from that small trading range. The weekly breakout therefore might run 50 points before the bulls take profits and the E-mini falls to below the June 5 high. Traders should expect a 5% to10% correction to start by the end of the month.
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