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S&P 500 E-Mini forms a parabolic wedge: what's next?

by SuperiorInvest

Market Overview: S&P 500 Emini Futures

The weekly chart is in a narrow bullish channel, which means a strong bull market, but it is also forming a parabolic wedge (November 22, December 28, and February 9). The bulls must continue to create follow-up buys above the all-time high. The bears want a reversal of a double top (with the all-time high) and a large wedge pattern (February 2, July 27 and February 9).

S&P 500 Emini Futures

S&P 500 Emini Weekly Chart

S&P 500 Emini Weekly Chart

  • This week's Emini candle was another bullish follow-through bar that closed near its high and above the trend channel line.
  • Last week we said that while the market remains always long, the rally has been long lasting and slightly climactic. Traders expect a minor pullback and are looking for signs of it.
  • This week it tested and closed above the all-time high.
  • The bulls continue to make follow-up purchases in a narrow bullish channel. That means strong bulls.
  • They want a strong breakout into new all-time high territory, hoping it will lead to many months of sideways trading higher.
  • Swing bulls would continue to hold their long position established at lower prices, believing that any pullback will likely be minor and that the market has moved into a bullish channel phase.
  • Bears hope the strong rally is simply a buy-gap test of what they believe is a high of the 38-month trading range.
  • They want a reversal of a double top (with the all-time high) and a large wedge pattern (February 2, July 27, and February 9). They want a failed breakout above the all-time high and the trend channel line.
  • They also see a parabolic wedge in the third bullish leg since October (November 22, December 28 and February 9).
  • They hope to get at least a TBTL (Ten Bars, Two Legs) knockback.
  • The problem with the bear case is that the rally is very strong. The only bearish bar in the rally had no subsequent selling.
  • They would need a strong reversal bar, micro double top or a reasonable signal bar before traders would think about selling aggressively.
  • Since this week's candle is a bullish bar that closes near its high, it is a buy signal bar for next week.
  • The market may rise on Monday. Small gaps usually close early. A late gap in a trend often turns into an exhaustion gap.
  • Traders will see if the bull can create another bullish follow-through bar and resume the move higher. Or will the market stop at the all-time high zone?
  • While the market remains always long, the rally has been long lasting and slightly climactic.
  • Traders expect a minor pullback and are looking for signs of it. So far, there are still none.
S&P 500 Emini Daily Chart

S&P 500 Emini Daily Chart
  • The market traded sideways higher during the week, surpassing the all-time high.
  • We previously said that the odds slightly favor the market remaining always long. Traders will see if the bulls can continue to create sustained rolling buying to reach the previous all-time high.
  • This week it tested the all-time high. The Bulls got what they wanted.
  • They got the third leg with a double bottom bull flag (January 5 and January 17) or a wedge bull flag (December 20, January 5 and January 17).
  • They expect the current rally to form a peak and channel that lasts for many months after the recent pullback (in January).
  • They want a strong break above the all-time high with subsequent buying.
  • If there is a deeper pullback, the bulls want at least a small sideways move up to retest the current extremely high trend (now Feb 9).
  • Bears hope the strong rally is simply a new test of buying the all-time high.
  • They want a bearish reversal from a double top (with the all-time high), a large wedge pattern (February 2, July 27, and February 9), and a parabolic wedge (November 22, December 28, and December 9). February).
  • If the market continues to rise, the bears want a failed breakout above the all-time high.
  • The bears will need to create consecutive bearish bars that close near their lows and trade well below the 20-day EMA and the downtrend line to increase the odds of a deeper pullback.
  • For now, the buying pressure remains stronger (narrow bullish channel, small pullback) compared to the selling pressure (e.g. weaker bearish bars with no subsequent selling).
  • Friday was a bullish bar that closed near its high. The market may rise on Monday. Small gaps usually close early.
  • Late gaps in a trend may turn out to be exhaustion gaps, rather than a new breakout or measurement gap.
  • The odds slightly favor the market remaining always long.
  • However, the rally has been going on for a long time and is slightly climactic.
  • While there are no signs of selling pressure yet, traders should be prepared for a minor pullback that may begin within a few weeks.
  • Traders will see if the bulls can continue to create sustained continuous buying above the all-time high or not.

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