Emini and Forex Trading Update:
Wednesday July 31, 2019
I will update again at the end of the day.
Pre-Open market analysis
After a gap down yesterday, the Emini rallied to Monday’s low and entered a trading range. A late rally failed and the day ended back in the earlier trading range.
The Emini is in a bull trend on the daily and weekly charts. Yesterday closed above its open and formed a bull bar on the daily chart. It is a High 1 bull flag buy signal bar for today. If today goes above yesterday’s high, it will trigger the buy signal. The big tail on the top of yesterday’s candlestick makes it a weaker buy signal bar. There is an increased chance of more sellers than buyers above yesterday’s high.
The bears see yesterday as an entry bar for an 8 day wedge rally and a failed breakout above the July 15 wedge top. There are therefore consecutive wedge tops. The bulls hope that yesterday is only a pullback in a bull trend.
The daily and weekly charts should begin a 2 – 3 week selloff down to 2900 within a week or two. While it might begin with today’s FOMC report, the report could lead to a surprisingly big 1 – 3 day rally first.
Today is the final day of the month. Monthly support or resistance is much less important today than usual because the FOMC announcement will dominate everything.
Most of the price action over the past 2 days has been sideways. Day traders will expect the same up to 11 am. But they know there is an increased chance of a big move up or down after the report. Also, they understand that the move could reverse.
Overnight Emini Globex trading
The Emini is up 7 points in the Globex session. But traders know that the 11 am PST FOMC announcement will dominant the day. Day traders will look at the day as starting over at 11 am. Whatever takes place before 11 am has no correlation with what takes place afterwards.
There is typically a quick move in the wrong direction in the 1st minute after the report. Furthermore, there is a 60% chance of another reversal within the 1st 10 minutes. Consequently, day traders should not resume trading until at least 10 minutes after the report. They want to see either an unusually big trend bar up or consecutive trend bars in the same direction before taking a position.
Because today’s report is unusually important, day traders should be ready for anything. There is an increased chance of a big move up or down. Also, there can be a big reversal. Finally, there is a small chance that there is virtually no reaction and the Emini simply goes sideways in a tight range.
EURUSD Forex market trading strategies
The EURUSD daily Forex chart yesterday was the entry bar for a failed breakout below the 5 month trading range. But the bar was small. Traders wonder if it formed a micro double top with the high of either the bar from 2 days or 3 days earlier. If so, the chart now has a small bear flag after last week’s bear breakout.
Alternatively, today might be a pullback from yesterday’s reversal up. The bulls see a micro double bottom and a failed breakout below the May 52 week low.
There is therefore both a reasonable buy and sell setup ahead of today’s 11 am PST FOMC announcement on interest rates. Everyone knows that the Fed will probably cut its interest rate today. What no one knows is how much of that cut has already been priced into all financial markets. We will soon find out whether more dollars will buy or sell the news.
Overnight EURUSD Forex trading
The EURUSD 5 minute Forex chart has been in a 20 pip range overnight. Day traders are having a hard time trying to make even a 10 pip scalp.
This unusually small range is a reflection of how tightly coiled all financial markets are ahead of this particular likely Fed interest rate cut. All financial markets are in Breakout Mode, and traders know there is an increased risk of a big move up or down, or of a big reversal after 11 am PST today.
Sometimes traders begin to buy or sell strongly before the report. However, day traders should exit all positions ahead of the report. Most of the time, there is a strong brief move that reverses within the 1st minute after the FOMC announcement.
Also, there is another reversal within the 1st 10 minutes 60% of the time. Consequently, day traders should typically wait at least 10 minutes after the report before resuming trading. The need to see consecutive trend bars in the same direction or a huge trend bar up or down first.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
End of day summary
The Emini crashed after the Fed rate cut today, but reversed up violently to around 3,000. About half of the selling was caused by the gamma in options. Hedge funds and institution hedge their stock positions in many ways.
A common way is to buy puts. For them to buy puts, other firms have to sell puts. There are huge option firms that specialize in selling puts and calls. They are essentially selling insurance to all of the firms that buy stocks.
When the stock market goes down, the firms that buy puts have their losses partially offset by the puts that they bought. These puts increase in value. That means that the options selling firms that sold the puts are losing money on their short puts.
The rate of loss accelerates as the stocks fall. It is not linear. Gamma measures how fast option prices change with the change in stock price. The gamma becomes big during a quick selloff.
That increasing gamma means that the options selling firms are losing money at an increasing rate. When the gamma rises, option selling firms have to reduce their risk. One way to to short stocks. If they short enough, the risk of a further drop in the stock market will not create additional losses for them. What they lose from their short puts, they make from their short stocks and futures.
When there is a big down day like today, about half of it is due to fundamentals, like the bulls taking profits and the bears shorting. The other half is created by option selling firms protecting themselves from losses on the puts they sold. Therefore, a big down day is actually not as bearish as it looks.
This week fell below last week’s low. The weekly chart now finally has a pullback. However, since the 9 week rally was much weaker than the January rally, the pullback will probably last longer. The odds still favor a test of 2900 over the next couple weeks. August will probably trade below the July low.
See the weekly update for a discussion of the price action on the weekly chart and for what to expect going into next week.
Traders can see the end of the day bar-by-bar price action report by signing up for free at BrooksPriceAction.com. I talk about the detailed S&P Emini futures price action real-time throughout the day in the BrooksPriceAction.com trading room. We offer a 2 day free trial.
Charts use Pacific Standard Time
When I mention time, it is USA Pacific Standard Time (the Emini day session opens at 6:30 am PST, and closes at 1:15 pm PST). You can read background information on the intraday market reports on the Intraday Market Update page.