The Emini opened with a trend from the open bull trend and is Always In Long. Although the rally lacks consecutive big bull bars and tails were prominent, an 8 bar bull micro channel without any bear bodies is enough to make traders buy the 1st pullback for a scalp. With the rally lacking consecutive strong bull bars, it might evolve into a trading range, which could last for an hour or more until it reaches near the moving average.
While it is possible for the bears to create a parabolic wedge top and high of the day, there is no pattern yet. The best the bears will probably get over the next hour is a trading range. If there is a 2nd entry short, then bears can sell. They can also sell above weak bull flags. Otherwise, traders will continue to swing trade and scalp, even though they believe the upside is limited.
Because today is Friday and the high of last week will remain a magnet, traders will watch for a move toward it late in the day.
Pre-Open Market Analysis
S&P 500 Emini: Breakout mode price action
In my post of January 28, I wrote, “All of these factors make it likely that the Emini will trade sideways to up for the next week or two.” Nothing has changed, and that was my minimum objective (TBTL on the daily chart). The odds still favor a 2nd leg sideways to up, but there are still 2 things that are not yet clear. Did the first leg up end 2 days ago, or is the leg up a tight channel that will continue higher? If yesterday was the start of the pullback after the 1st leg, will it just go sideways or will it test down, possibly to last week’s low? The lack of clarity reinforces my opinion that the Emini is in a trading range. After the August 2015 sell climax, the trading range lasted more than a month.
The Emini has been in a tight trading range for 5 days. Although this is difficult for those trading the daily chart, the 5 minute chart has had big swings up and down and has been relatively easy to trade. The 5 day tight trading range is about 35 bars on the 60 minute chart. It is breakout mode price action. There is a 50% chance that it will be followed by a swing up, a 50% chance of a swing down, and a 50% chance that the 1st strong breakout will reverse. T
he past 2 days on the 5 minute chart created a triangle. Knowing this adds nothing because the breakout mode price action is already clear. However, since the range has become increasingly narrow, day traders because much more incline to scalp in the 2nd half of yesterday. This will continue today as well. However, the swings up and down have gone in the 5 day tight trading range and day traders will be quick to swing trade again as soon as there is a strong breakout with follow-through.
With about an hour to go before the open, the Emini is up 10 points and at the top of yesterday’s triangle. Until there is a breakout, there is no breakout.
Forex: Best trading strategies
Since the December 3 bull trend reversal, I have written many times that the EURUSD would probably go sideways for possibly a month or more. On December 7, I wrote, “since a trading range over the next month is more likely than a bull trend…”. Nothing has changed. The daily chart is in a tight trading range. The bulls see a head and shoulders bottom bull flag and expect at least one more leg up (December 3 was the 1st leg up) and a measured move up. The bears see a double top bear flag (December 15 was the 1st top), and a triangle (December 28, January 15) in a bear trend.
Although breakout mode price action in general has about an equal chance of a breakout up or down, and a 50% chance that the 1st strong breakout will fail, the strong December 3 bull breakout makes the probability slightly higher than 50%. Since the range has lasted more than 20 bars, the probability is no longer 55 – 60%.
Yesterday’s rally tested the top of the trading range and it broke above the 4 day 60 minute bull channel. I have guidelines for tests in both channels and trading ranges. There is a 75% chance that a bull breakout above a bull channel will reverse down and test the bottom of the channel. Since the channel is tight, it will not take much of sideways to down price action to reach that minimum goal.
Channels usually evolve into trading ranges, so a trading range is likely today. Eighty per cent of trading range breakouts fail, so there is only about a 20% chance that this rally will successfully break above the top of the month long trading range, and an 80% chance that it will soon reverse down to the middle of this 200 pip tall trading range.
As long as the EURUSD remains in this relatively tight range, most day traders will scalp, and many will enter with limit orders, selling above prior minor highs, buying below minor lows, scaling in and using wide stops, and scalping for 10 pips. When there is the occasional brief breakout, day traders will enter at the market and on pullbacks, and try so scalp out with 20 or more pips. Most traders cannot do this profitably. They instead should look for 20 – 50 pip scalps on the 60 minute chart, or simply wait for the breakout of the trading range.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini broke above the 5 day trading range and the bulls are hoping that the 2nd leg up from the low of 2 weeks ago has begun.
See the weekly update for a discussion of the price action on the weekly candlestick chart and for what to expect going into next week.