Emini correction could give back all of 2018 gains
Pre-Open market analysis
For the past month, I said that the Emini looked weak and that it would probably pull back to the 20 week EMA. The bears accomplished that goal yesterday. Furthermore, I said that it probably test 2800. Yesterday closed below 2800. If there is strong follow-through selling within the next few days, the Emini might test last year’s close of 2689.75. This would give back all of 2018’s gains.
After yesterday’s sell climax, there is a 25% chance of another big bear trend day today. However, there is a 75% chance of at least a couple hours of sideways to up trading starting by the end of the 2nd hour.
Yesterday was a surprisingly big day. A huge Surprise Day has a 75% chance of at least a 2nd small leg sideways to down within the next 5 bars. The bulls and bears will sell the 1st 1 – 3 day rally. However, traders might buy a 1 – 3 day test down to yesterday’s low. This could create a micro double bottom and end the October selloff. This is what we will find out over the next week.
Option selling firms sell stocks to hedge their short puts
Yesterday was not as bearish as it appears. About half of the selling was caused by options selling firms who were hedging their short puts. As the Emini falls, those short puts gain in value at an increasing rate (option gamma). The selling firms have to sell stocks and futures to hedge their short puts. Their selling accounts for about half of the selling on a day like yesterday.
By the close, they are fully hedged. Therefore, half of the reason for the selling no longer exists. In addition, since half of the selling was not due to fundamentals, the price ended up lower than what the fundamentals would dictate. That is why bull days so often follow big bear days.
Will today be a big bull day? There is only a 25% chance. Even though option selling firms were hedging, the selloff violated many technical levels. That will make other traders sell. The odds are that the Emini will go at least a little low lower and possibly test last year’s close within a couple weeks.
Overnight Emini Globex trading
The Emini is down 4 points in the Globex session. While today’s range will probably be much smaller than yesterday’s, it will likely be much bigger than the average range of the past several months. Therefore, even though today will probably have a lot of trading range trading, the legs up and down will be big. Day traders should therefore look for bigger profits on swings and scalps until the bars and the legs get back to normal size.
EURUSD Forex head and shoulders bottom
Despite the 3 day rally from a higher low major trend reversal bottom, only 40% of major reversal setups lead to strong trends. Therefore, this 3 day rally will probably be minor, which means another leg in the 6 month trading range. It is near a 50% retracement of the 3 week selloff.
Also, I have been saying that the chart would probably enter a trading range between 1.14 and 1.16 for a couple of weeks. The momentum up is strong and therefore the bears will likely need a micro double top before they can create a leg down.
If there is a selloff within a couple of weeks, it probably will reverse up from around this week’s low. That would create a double bottom higher low major trend reversal. It would have a better chance of leading to a breakout above the 6 month trading range.
Overnight EURUSD Forex trading
The EURUSD 5 minute Forex chart rallied 80 pips over night. However, it is now around the top of the October 3 sell climax, which is resistance. It is the target I have mentioned several times over the past week. In addition, the day’s range is already big compared to other days on the daily chart. Furthermore, the overnight rally had a series of brief breakouts followed by tight trading ranges. This is a series of buy climaxes. It typically evolves into a trading range. Therefore, the upside from here is probably small today. The overnight bull trend will likely evolve into a 40 – 50 pip trading range soon. Day traders will probably scalp for 10 – 20 pips, betting on reversals.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini had a big bear body today, despite the late reversal. Look back at the 1st half of the year. You will see that the year oscillated around last year’s close. The odds now are that the Emini will fall below 2700 and test that level again.
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.
Impressive as usual. Can you please share how you check that the sell was due to options selling firms hedging their puts? Is there some market data that you look for in order to detect this or you are just saying it based on experience? Is it because the VIX didn’t explode on 10 October but did so on 11 Oct?
There is no way to know because the firms do not report that activity. It is just logical that they are doing that.