S&P 500: Deep Pullback or Major Higher Low and Reversal?

The S&P 500 monthly Emini bulls need follow-through buying following the strong reversal from the April 9 low. They hope the selloff (Apr 7) has alleviated the overbought conditions. The bears want the market to form a lower high and the bear trend line to act as resistance.

S&P 500 Emini Futures

The Monthly Emini Chart

• The April monthly Emini candlestick was a bear doji closing in its upper half with a long tail below and closing around the 20-month EMA.
• Last month, we said traders would see if April’s candlestick could close as a strong bear bar near its low or with a long tail below instead.
• The market traded significantly lower early in the month, followed by sideways to up, erasing most of the move.
• The bears got a strong selloff in April, but the large reversal and long tail below the candlestick indicate they are not as strong as they hoped.
• They hope to get a retest of the April 7 low, even if it only forms a higher low.
• If the market trades higher, they want it to form a lower high. They want the bear trend line to act as resistance.
• They want May’s candlestick to close with a long tail above or with a bear body closing below the 20-month EMA.
• The bulls see the market forming a major higher low. They hope the selloff (Apr 7) has alleviated the overbought conditions.
• They want the market to continue in a broad bull channel, followed by a breakout above the all-time high.
• The bulls need to create a strong bull entry bar in May to increase the odds of a resumption of the trend.
• The market formed a big move down in April, followed by a big move up.
• Big Down, Big Up creates big confusion and usually leads to a trading range.
• For now, the market could still trade slightly higher.
• Traders will see if the bulls can create a strong bull entry bar in May. If they do, that can swing the odds in favor of a resumption of the broad bull channel.
• Or will May trade slightly higher but close with a long tail above or with a bear body instead?

The Weekly S&P 500 Emini Chart

• This week’s Emini candlestick was a bull bar closing near its high with a long tail below.
• Last week, we said traders would see if the bulls could create a follow-through bull bar testing near the 20-week EMA, or if the market would trade slightly higher but close with a long tail above or a bear body instead.
• The bulls got a follow-through bull bar testing near the 20-week EMA.
• They see the selloff (Apr 7) forming a major higher low, and the market is in a broad bull channel.
• They hope that the strong selloff has alleviated the prior overbought conditions. They want a resumption of the trend.
• They want a reversal from a higher low major trend reversal (Apr 21).
• If there is a pullback, they want it to be minor, forming another higher low (vs Apr 21).
• They hope that the market has flipped into Always In Long.
• They must create more follow-through buying trading above the 20-week EMA and the March 25 high to increase the odds of a trend resumption.
• The bears got a large 2-legged selloff testing the 200-week EMA in a tight bear channel.
• They hoped to get a retest of the prior leg’s extreme low (April 7), but the move lacked follow-through selling, forming a higher low (Apr 21).
• They see the current move as a deep pullback and a buy vacuum test of the March 25 high.
• They want it to stall around the March 25 high, forming a large double top bear flag.
• They want the 20-week EMA or the March 25 high to act as resistance.
• They hope to get another leg down to form the wedge pattern after the pullback (the first two legs being the Mar 13 and Apr 4 lows).
• So far, the buying pressure since the April 7 low has been stronger (strong bull bars closing near their highs) than the weaker selling pressure (bear bar with limited follow-through selling).
• The market could still trade at least a little higher towards the March 25 high area.
• Since this week’s candlestick was a bull bar closing near its high, it is a buy signal bar for next week.
• The market can gap up next week. Small gaps usually close early.
• Traders will see if the bulls can create a follow-through bull bar closing above the 20-week EMA.
• Or will the market trade slightly higher but close with a long tail above or with a bear body instead?

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Written By: Al Brooks