The Emini ended yesterday always in long, but at the top of a spike and channel pattern. This usually evolves into a trading range. Today’s strong reversal down made the market always in short, and today can become another strong bear trend day. Because the Emini is at the bottom of the 60 minute trading range and has been bouncing, the odds are that the bear breakout will not happen today and that this strong early selloff will transition into a trading range within the first hour or two. Until it does, bears will continue to swing shorts. If two-sided trading develops, bulls will begin to buy for scalps, hoping that a bull breakout develops. If one does, they might then swing trade. Until then, the bears are in control. The bull are hoping for stability here and then a major trend reversal up, but the selloff was strong enough to make a bull trend day unlikely.
My thoughts before the open: Support at the bottom of the trading range
As big as the selloff has been, the Emini is still holding above the December 16 low, which was the start of the last leg up on the daily chart. Even if it falls below that low, the daily chart then enters a big trading range with the October low as the bottom. The weekly and monthly charts are still in bull trends, but I have written repeatedly for months that they are both overbought and about a 200 point pullback was likely. If the daily chart falls below the December low, the chances of that happening would go up.
At the moment, the Emini is trying to reverse up again from yesterday’s low and the January 6 low. This 3rd reversal up makes a triangle. The Emini is in breakout mode and the target is either a measured move up or down on the 60 minute chart.
Since the Emini is near the bottom of the 3 month 60 minute trading range and most breakouts fail, the odds are that this selloff will reverse up one more time and that the trading range will simply gain more bars. However, a successful breakout will eventually come.
When the market is at the apex of a triangle, as it currently is on the 60 minute chart, the trading range activity usually increases. Although the ranges have been big enough for swing trades, traders will increasingly come to believe that the breakout will fail. This increases the chances of trading range activity.
This will also make a trading range more likely on the 5 minute chart today. However, if there is a breakout up or down with follow-through, swing traders will hold onto most of their positions.
Summary of today’s price action and what to expect tomorrow
See the weekly update for a discussion of the weekly chart and for what to expect going into next week.