The Emini gapped down and sold off for the first several bars. It is always in short and this could become a bear trend day. The bulls need a strong reversal before bulls will consider swing trading. The selling is so strong that they will also be hesitant to scalp until the Emini begins to form some bull bodies. The Emini closed the gap up from 2 weeks ago, and the bear breakout has been strong. The risk is currently big, but the probability of lower prices is high. Since the Emini is far from the moving average, many traders will wait for a low 2 or wedge bear flag before shorting, which would allow them to short with a tighter stop and therefore they would have less risk.
The bears closed the gap up from 2 weeks ago, but the Emini is far from the moving average and it might have to go sideways to up for an hour or two before the bears will look to sell again. Unless the bulls are able to create a strong reversal, the best they can hope for is a trading range. At the moment, today is a bear trend day. It will probably go mostly sideways for an hour or two until it gets closer to the moving average. The bears will then look to sell again. The odds favor a bear trend day. A trading range day is also possible. A bull reversal is not likely, but traders will be willing to swing trade from the long side if the bulls create a strong reversal up. Until then, swing traders will only look for shorts.
Here are my thoughts before the open. As I mentioned over the weekend, there was a chance that the Emini might gap down and form an island top trend reversal. It looks like that will happen today. Although the probability of a 50 point or more drop is small, the risk is relatively small. Bears will put stops either 1 tick or a few ticks above yesterday’s low (Friday’s low), and they are risking about 10 points to make 50 or more points. Their first target is a test of the September 19 high of 2012.75, which is the breakout point.
Whenever the risk is small relative to the reward, the probability is low because there has to be a reason for institutions to take the other side of the trade. This means that it is more likely that the gap down will fail either today or within a few days, and therefore the bulls will buy the selloff and scale in lower. They know that probability is on their side, even though risk is relatively big. They will exit if the Emini begins to form a big bear breakout with follow-through.
This can happen with one huge bear bar, or 2 – 5 smaller bear bars that close near their lows. If the bears can create the breakout, then the bulls will be trapped and will look for any rally so that they can exit their longs with a smaller loss. The result? A lower high major trend reversal and at least one more leg down.
Day trading outlook for tomorrow’s Emini price action
See the weekend update for my thoughts about the higher time frames. They are all overbought and at the top of channels. The odds are that they will pull back. The island top is a possible start of that pullback. The math is good for the bears. They shorted today and have a stop above yesterday’s low. They know that they will probably lose money, but the probability of this pullback testing the breakout above the September high might be 30%. The reward is big enough relative to the risk to make the short acceptable. The bears need follow-through selling before traders become confident that the Emini will test that high around 2013, and then 2000.
The bulls see the gap bars on the 60 minute chart and will buy, betting that the Emini will at least test the all-time high. A rally after a gap bar late in a bull trend usually is the final leg before a major trend reversal triggers. However, there is enough room for the bulls to profit, and there is also the small possibility of a successful breakout above the tops of the channels.
When there is an island reversal, the Emini often goes sideways for several days as the bulls and bears fight for control. The bulls want the trend up to reverse. That could happen with a gap up at some point over the next few days. That would create an island bottom and it would increase the chances of a tight trading range on the daily chart. The bears want a strong bear breakout and a trend down. Until that happens, a trading range remains the most likely outcome for the next few days and possibly for the next week or two.
Premarket price action analysis
See yesterday’s intraday market update report for today’s premarket analysis. Once there, scroll down to the heading, Day trading outlook for tomorrow’s Emini price action.
See the weekly update for a discussion of the weekly chart and for what to expect going into next week.