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Traders Likely to Continue to Take Profits
07/09/2018 4:00 pm EST
The monthly S&P 500 Emini futures candlestick chart has been sideways for six months. This follows the most extreme buy climax in the 100-year history of the stock market, writes Dr. Al Brooks Saturday.
Since last month closed near its low, it is a sell signal bar for this month. However, it is a doji in a six-month tight range. Therefore, there are probably more buyers than sellers below last month’s low. Furthermore, the four-month rally has been weak. Consequently, the monthly chart is likely to go sideways for at least another month.
Because last year’s bull trend was so strong, the odds favor a test of last year’s high. But, buy climaxes usually have at least two legs sideways to down. Therefore, June might be a pullback (bounce) from the first leg down. There is currently a 40% chance of a second leg down that falls below the 20-month EMA before there is a new high.
The weekly S&P 500 Emini futures candlestick chart had a bull trend bar this week in a 14-week tight bull channel. It is therefore a buy signal bar for next week. However, as long as this rally stays below the March high, it is only a bull leg in a six-month trading range.
The weekly S&P 500 Emini futures candlestick chart turned down a month ago from a double top lower high with the March high. The three-month rally was also a wedge. However, this week rallied after a three-week selloff. In addition, it was a bull trend bar and therefore a buy signal bar for next week.
But, the three-week selloff followed a three-month rally that had three legs up. That rally is therefore a wedge top. A reversal down from a wedge usually has at least two legs. So, even if next week goes above this week’s high, the rally might only last a week or two. The bears will try for a second leg sideways to down.
There is currently a 40% chance of a test of the February low before a break above the March high. In addition, there is a 30% chance of a strong break below the February low. That would be a second leg down after the strong first leg down in February.
Trading ranges always look like they are about to break out
The past eight weeks have been in a tight range, and trading ranges resist breaking out. Furthermore, this tight range is in the middle of the six month trading range. Therefore, the odds are that the Emini will continue mostly sideways for at least another week or two, even if next week continues this week’s rally.
When a market is in a trading range, each leg up and down always looks like the start of a trend. However, 80% of them fail and lead to opposite legs. Until there is a breakout, there is no breakout. The odds continue to favor reversals every few weeks.
The daily S&P 500 Emini futures candlestick chart sold off for the past month after a wedge rally. The odds favor higher prices next week. But, a wedge top usually has a second leg down.
The daily S&P 500 Emini futures candlestick chart reversed up last week ending July 6. Since it formed a higher low compared to the May 29 low, it is still in the bull trend that began with May 3 low.
However, the month-long bear channel was tight. In addition, a wedge top usually has a second leg down. Therefore, the odds are that any rally will stall within a couple of weeks.
The bears want a lower high major trend reversal after the three-month bull trend. That lower high would be after a wedge top. Hence, it would also form a right shoulder of a head and shoulders top.
Most tops lead to trading ranges and not opposite trends. So, a selloff from a lower high would probably be just a second leg down from the May high. The six-month trading range would then likely continue. Until there is a strong breakout up or down, traders will continue to take profits after a few days and up to a few weeks.