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S&P E-mini Bull Signal

07/15/2019 9:48 am EST

Focus: MARKETS

Al Brooks, MD

Professional Trader, Author, Lecturer, Brooks Price Action, LLC and Brooks Trading Course

The E-mini S&P 500 triggered a buy signal on the monthly chart when July traded above the June high.

The monthly E-mini S&P500 futures has a small bull trend bar so far in July. July is a breakout above the September/May double top and the 19-month trading range. The bigger a breakout is, the more likely it will be successful. However, a small bull bar is still good for the bulls (see chart).

Emini monthly candlestick chart has breakout above oo bull flag

It is important to remember that June was an outside up bar after an outside down bar in May. July trigger an “OO” (consecutive outside bar) buy signal by trading above the June high. There is now a 60% chance that the next three months will be sideways to up.

The bears want the breakout to fail. They need a bear bar closing near its low to convince traders that a reversal down is about to begin. Additionally, they want a big bear bar. That will attract more sellers in August and increase the chance of a failed breakout. Until they get it, the bulls will remain in control.

Expanding triangle top

I have been writing about a possible expanding triangle top since the strong reversal up in January. The top of the triangle is the line drawn across the January 2018 and September 2018 highs. That line is currently around 3040.

Most reversals come from undershoots or overshoots. They rarely come exactly at support or resistance. July has not reached the line. If there is a reversal down from here, there would be an undershoot.

Overshoots are slightly more common. On the daily chart, traders look for 1% to 2% overshoots. That means if the rally continues to 3,100 – 3,150, traders will become more wary of a reversal. Since there is room to that area and the OO buy signal should have follow-through this summer, the odds continue to favor at least slightly higher prices.

Everyone knows that big reversals often come in August, September and especially October. Traders will remain cautiously bullish for at least a few more months.

The monthly S&P 500 chart below shows an example of an expanding triangle top from 1973.

S&P500 Expanding Triangle top and bull flag

Look back at the January 1973 high. It was the third leg up after the February 1966 and December 1968 legs. A reversal down from an expanding triangle top often leads to an expanding triangle bull flag. That is what happened then. The stock market has been in a strong bull trend on the monthly chart since that October 1974 low, despite a few big two- to three-month selloffs.

Consecutive bull bars

The weekly E-mini S&P500 futures broke above the September/May double top two weeks ago. Last week was the second consecutive bull trend bar on the weekly chart. When a breakout has consecutive bull bars, traders see the 2nd bar as confirmation. They conclude that the breakout is succeeding and they expect higher prices. With this week closing on its high, next week might gap up. 

Emini weekly candlestick chart testing top of expanding triangle

The weekly chart has the same expanding triangle top that is on the monthly chart. Since there is room to the top of the triangle and there are now consecutive bull bars, the probability favors at least slightly higher prices.

There is always a bear case. If next week is a bear trend bar, traders will wonder if the two-week breakout will fail. However, after two strong bull bars, the bears will probably need at least a micro double top before they can reverse the trend. Consequently, the first reversal down will probably be only a one- to two-week pullback.

Unexpected events (black swans) can come at any time. If this week forms a surprisingly big bear bar closing near its low, it will overwhelm the past two weeks. If the bear bar is huge, traders will conclude that the breakout has failed. They will then assume that a reversal down from an expanding triangle top is underway. By definition, a Bear Surprise Bar is a surprise, which means that it is unlikely.

Tight bull channel

The daily E-mini S&P500 futures has rallied strongly from the June 3 low. Once the E-mini pulled back on June 11, the spike (breakout) phase of the bull trend ended. The channel phase began with the June 12 low. A breakout followed by a channel is a Spike and Channel Trend. It typically evolves into a trading range.

Emini daily candlestick chart in tight bull channel

There are now four pushes up in a tight bull channel. Once a tight bull channel has at least three legs up, it is a parabolic wedge. That is a buy climax. While the rally can continue indefinitely, the bulls usually begin to look to take some profits once a rally becomes climactic.

In 25% of bull channels, the market accelerates up and successfully breaks above the bull channel. It then is again in a breakout phase. Over time, the breakout has a pullback. The trend weakens and enters a channel.

Most of the time, a bull breakout above a bull channel fails within five bars. The market then reverses and has a bear breakout below the bull channel. Whether or not there is a failed bull breakout, there is a 75% chance of a successful bear breakout below the bull trend line. That means that a bull channel behaves like a bear flag.

Traders expect the eventual bear breakout to lead to a swing down and a transition into a trading range. Once there is trading range price action, the chart is in breakout mode. The bulls want a bull breakout and a resumption of the bull trend. However, the bears want a bear breakout and a reversal of the bull trend into a bear trend.

This bull channel will eventually exhaust itself and evolve into a trading range. Until it does, the odds favor higher prices. But the rally already has four legs up. Consequently, the bulls will be quick to take profits if they see signs of exhaustion.

The most obvious one would be a big bear reversal day that makes a new high and closes on its low. Perfect setups only exist on dishonest websites. Most of the time, a reversal is less clear. When in doubt, stay out. Wait to see convincing evidence that the bears are in control before shorting.

For example, if there is a weak sell signal bar, wait to see if there is a second signal bar a few days later. Or, look for two consecutive big bear bars or three consecutive smaller bear bars. A single huge bear bar is often reliable evidence that the bulls are taking profits.

One of these tops should form within the next few weeks. But the “OO” buy setup on the monthly chart means that the E-mini will probably be sideways to up for at least two or three months. Therefore, traders expect the first reversal down to be minor. That means a two- to four-week pullback followed by another test of the high.

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