Emini and Forex Trading Update:
Thursday January 21, 2021
I will update again at the end of the day.
Pre-Open market analysis
The Emini gapped up and formed a huge bull trend and big bar yesterday on President Biden’s first day in office. Yesterday’s close will probably be tested several times over the next couple years. For example, the close of President Trump’s 1st day was tested in his 2nd and 4th years.
What is more important for Biden, the close of the 19th or 20th? It probably is different for different firms. I usually pay attention to the close of the 20th.
There is a magnet above at the measured move target of 3875.75, based on the September 24/October 30 double bottom. However, the day after a strong bull trend day has only a 25% chance of being another strong bull trend. If today is a bull trend day, it will probably be weaker, like a Trending Trading Range Day or a Broad Bull Channel.
Since yesterday’s rally was climactic, there is a 75% chance of at least a couple hours of sideways to down trading, beginning by the end of the 2nd hour.
Overnight Emini Globex trading
The Emini is up 6 points in the Globex session. The final 3 hours yesterday, and the Globex session, have been testing the 3850 Big Round Number.
Buy climaxes like yesterday typically attract profit takers. Traders often refer to it as exhaustion, or an exhaustive buy climax. Most climaxes lead to trading ranges and not trend reversals. Consequently, day traders will look for a trading range today. That means at least one swing up and one swing down.
The 2-month bull channel on the daily chart has had many reversals after big trend days up and down. There is therefore a slightly higher probability of a big bear day today. But day traders are expecting a lot of trading range price action today. They will switch to trend trading if there is a strong series of trend bars in either direction.
Yesterday’s setups
Here are several reasonable stop entry setups from yesterday. I show each buy entry with a green rectangle and each sell entry with a red rectangle. Buyers of both the Brooks Trading Course and Encyclopedia of Chart Patterns have access to a much more detailed explanation of the swing trades for each day (see Online Course/BTC Daily Setups).
My goal with these charts is to present an Always In perspective. If a trader was trying to be Always In or nearly Always In a position all day, and he was not currently in the market, these entries would be logical times for him to enter.
If the risk is too big for your account, you should wait for trades with less risk or trade an alternative market like the Micro Emini.
EURUSD Forex market trading strategies
The EURUSD Forex market on the daily chart has been in a trading range for 2 months. Trading ranges can last a long time. Most breakout attempts fail.
The EURUSD has been reversing up for several days after testing the bottom. This 3-day rally is a test of the January 13 lower high. If the bulls can break strongly above it, traders will expect another attempt to break above the top of the range.
The bears will try to form a double top with that high. If the EURUSD reverses down from there, traders would look for another test of the bottom of the range. The rally would be a lower high major trend reversal, and the right shoulder of a head and shoulders top. That would be a sell setup.
While that sounds great for the bears, there is only a 40% chance that any major trend reversal will actually lead to a major trend reversal. The bears would still need consecutive closes below the bottom of the range (the January 1 low) before traders will conclude that the trading range had broken out into a bear trend.
While a trading range is neutral, the probability fluctuates a little within it. It depends on the strength of the legs up and down, and on the ever-changing patterns.
There is currently better than a 50% chance that the bears will win. However, if this 3-day rally breaks strongly above the January 13 high, the odds will shift to being slightly in favor of the bulls. What happens around that January 13 high over the next week will be important. It will give traders a clue about what to expect over the next couple weeks and maybe over the next couple months.
Overnight EURUSD Forex trading
The 5-minute chart of the EURUSD Forex market has been rallying overnight. It is now above yesterday’s high. Traders expect a test of the January 13 lower high over the next few days.
The overnight rally has been in a bull channel. That is a weak trend. It usually evolves into a trading range. But until there is a 20-pip pullback, day traders will focus on buying. Once it transforms into a trading range, day traders will also sell for scalps.
Can today accelerate up and break above the January 13 lower high? Probably not. The 3-day rally has had a lot of overlap on the daily chart. It looks more like a weak leg up in the 2-month trading range on the daily chart, rather than the start of a bull trend.
What about a reversal down today? It is trading just above yesterday’s high, and yesterday was a bear day on the daily chart. That is not a good buy signal bar. It could reverse down, but traders really want to see what will happen at the January 13 high. Therefore, if today reverses down, it will probably be minor. There is still about 50 pips of room left to that magnet above, and the EURUSD will probably get there within a few days.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
Here are several reasonable stop entry setups for today. I show each buy entry with a green rectangle and each sell entry with a red rectangle. Buyers of both the Brooks Trading Course and Encyclopedia of Chart Patterns have access to a much more detailed explanation of the swing trades for each day (see Online Course/BTC Daily Setups).
My goal with these charts is to present an Always In perspective. If a trader was trying to be Always In or nearly Always In a position all day, and he was not currently in the market, these entries would be logical times for him to enter.
If the risk is too big for your account, you should wait for trades with less risk or trade an alternative market like the Micro Emini.
End of day summary
As I said was likely, today was a trading range day. It had a couple legs up and down, and it closed just below the open. Since it was not a strong bear bar on the daily chart, it was a reasonable follow-through bar for the bulls. That increases the chance of at least slightly higher prices.
Tomorrow is Friday so weekly support and resistance can be important. This is especially true in the final hour. With this week being a big bull bar at a new all-time high, the bulls would like the week to close on its high. The bears would like it to close below last week’s high, but that is more than 30 points below today’s close and it might be out of reach tomorrow.
See the weekly update for a discussion of the price action on the weekly chart and for what to expect going into next week.
Trading Room
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 Market Update page.
Dear Al, if I am not mistaken, we are pretty far from the weekly MA20 and we have actually touched it last quite some weeks ago (November?), with a long series before touching it previously as well (the May to Oct rally). My question is: with all the euphoria going on and while we keep pushing higher every day into uncharted land, isnt it time for some bulls to stop buying so far away from the MA reload again as we touch it? Or in the current infinity money-print, we can go much higher away from the MA without touching it? (from 2016 to 2018 we basically kept grinding higher without touching the weekly MA20 at all). I am obviously short, so my question is from here on, what are the probabilities we simply enter a higher channel and dont look back anytime soon?
There are currently two types of buyers at this point. The momentum traders buy as long as the market goes up. But as soon as it stalls or starts to turn down, they are quick to dump their longs. That is one of the reasons that the selloffs are big and fast, when the come.
Unfortunately, you have discovered that you are the other type of buyer. Many traders who are short cannot take the pain. They keep shorting and then buying back their shorts for a loss once they discover that no one else is shorting.
The reason why they buy back their shorts is that their position is too large. It doesn’t take much of a rally to make them sick to their stomachs, and then they buy back their shorts. This is the single most important reason why only professionals should short in a bull trend.
Strong bears sell small and sell more higher. They know that eventually there will be a sharp reversal down. They will get out around breakeven on their 1st shorts and with a profit on their higher shorts.
Many adjust their positions regularly. They sell more on strong bull days to raise their average price. They then reduce their position when it gets back to their average price. If the reversal down looks minor, they exit their entire position at around breakeven, usually with at least a small profit, and then start the process over on the next strong rally.
There are two things that make this work for them. The most important is that they trade an “I don’t care” size so that they never worry when the market goes against them. Next, they manage their trades well. They sell more at the top of strong rallies, and only buy on sharp selloffs. That is the exact opposite of what individual traders do.
As to your question about how long the rally can go without a correction, I think not much longer in terms of time, but it could accelerate up into a blow-off top. There are many variations of a Wall St. adage. Here’s one… “A market can keep going against you a lot longer than you can stay solvent.”