The bulls had a big gap up and want a rally to above Wednesday’s lower high to end the head and shoulders top. The bears got a parabolic wedge top, which is usually followed by a trading range or an hour or so. At that point, if the bears get a strong breakout, the day can become a bear trend day.
At the moment, the gap up and failed breakout below the 60 minute head and shoulders top neck line make it likely that the bulls will get above Wednesday’s high today or Monday. The parabolic wedge top has about a 50% chance of becoming the start of a bear trend day but the bears need a bear breakout.
Pre-Open Market Analysis
S&P 500 Emini: Candlestick pattern created buy signal on the daily chart
The Emini reversed down in a sell climax after Wednesday’s buy climax. It has been in a trading range for 3 weeks, and it is near the top of its 2 year trading range. When the market is in a trading range, traders say, “Sell the rips (when it ‘rips’ or rallies strongly), buy the dips.” This is exactly right. When the market is in a trading range, my 80% rule says that 80% of breakout attempts up and down fail. This means that a trader is more likely to make money if he expects strong trends within the range to reverse that to continue.
Yesterday’s series of sell climaxes created a sell vacuum test of the December 31 close. The Emini dipped 1 tick below, making the Emini briefly negative on the year, and then reversed up into the close. It is up 16 points in the Globex session, testing yesterday’s high, totally reversing yesterday’s selloff.
It also tested the 20 day EMA. This created a 20 Gap Bar buy signal, and that was also a reason for the rally. When the bulls have been willing to buy at an above average price for a long time, they are usually very eager to buy once the price gets back to average.
I have been writing for over a month that much of the March rally would probably end up as a bull leg in a trading range. Nothing has change. While last week’s high might be the top of the range, there are still 2 other lower highs below the all-time high, and the Emini can still go higher, but not break above the July all-time high. The odds are still against the new all-time high, but the strength of the 2 month rally have raised the odds to more than 40%. Traders who only see the lower highs on the daily chart over the past year and ignore the failed bear breakout in February are not assessing the market accurately.
The past 4 trading ranges within the 2 year trading range have all been about 100 points tall and lasted a month or more. This one will probably be the same. For that to happen, the bears need a break below the 3 week range and then a measured move down. This 3 week range formed a head and shoulders top on the 60 minute chart. Only 40% of strong reversal patterns lead to a reversal.
The top is in effect as long as all rallies stay below the right shoulder, which is Wednesday’s lower high. A bear trend needs lower highs. Well, guess where the Emini is headed? Whenever there is an important price that determines where the Emini is within the market cycle, it is a magnet. The 60 minute chart is in a trading range, which means that is it in both a bull and bear trend. The bear argument ends once the Emini stops making lower highs. If the Emini breaks above Wednesday’s high on the 60 minute chart, the Emini is back to being in a bull trend. The bears will need another top.
Although the probability of a reversal is more than 50% on the daily chart, it is only 40% on the 60 minute chart. In general, higher time frames have more influence, but if a day trader is looking at the 60 minute chart, he correctly is more bullish over the next 2 weeks than a trader looking at the daily or weekly charts.
Even though the daily chart has been sideways for a few weeks, there have been many good swing trades. Day traders will assume that this will continue until is becomes clear that it is no longer the case.
Today will probably gap up. Like all big gap days, there is a 25% chance of a strong trend up or down, and a 50% chance that the initial move up or down will only last about 5 – 10 bars and the Emini will then go sideways for a couple of hours until it gets closer to the moving average.
I have to leave early today and will be unable to post more until after the close.
Forex: Best trading strategies
The EURUSD has had 5 consecutive sideways doji bars on the daily chart. While it has done enough to reverse down from a Low 4 sell signal on the daily chart, this is a very neutral pattern. There is still a 50% chance of at least one more leg up to test the October 16 lower high around 1.1500, despite the nested wedge top.
The breakout up or down from this 6 day tight trading range has a 50% chance of going for a measured move, and a 50% chance of reversing and going for an opposite measured move. Until there is a clear breakout, online day traders will continue to mostly scalp. While there have been a few 30 – 50 pip trades, most trades have been with limit orders. It is easier to make money if a scalper can use wide stops (like about 30 pips) and scale in.
This is very difficult for most traders to do, but it is the best way to trade when the daily range is small and there are lots of reversals. It is better to bet that breakouts up and down will reverse. Traders look to sell rallies and buy selloffs, often entering with limit orders and scaling in. Most traders should take few, if any, of there trades, and instead either wait for a strong breakout, or look for patterns on the 1 – 4 hour charts. For example, some traders sell above highs near the top of the 6 day range and buy below lows near the bottom and scalping for 30 – 50 pips.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
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.