The bears got follow-through selling on the open, and it sometimes lasts for an hour or two. While it is possible that today could be a big bear trend day, the odds are that the selling that began yesterday has been climactic enough to entice the bears into taking profits within the 1st hour or two. This means that the odds still favor a 2 hour sideways to up move starting once this follow-through selling ends.
The Emini is Always In Short, but in a sell climax. The bulls should wait to buy above a bull trend bar, and the probability will be higher if the buy signal is a micro double bottom. When the bear channel is this tight, the 1st reversal up is often minor and part of a trading range. The bulls usually will need a major trend reversal, which means that the 1st leg up is usually sold, and the bulls look to buy a reversal up from a test back down. Until there is a reasonable bottom, traders will continue to sell for scalps and swings, knowing that the odds favor a reversal up at any point. They hope to make enough profit in the meantime to more than offset the loss once the reversal up comes.
Pre-Open Market Analysis
S&P 500 Emini: Learn how to trade a sell climax in bull trend
The E mini has turned down on the daily chart from a series of consecutive buy climaxes just below the all-time high. The odds are that it will have 2 legs down. The bears are probably near the end of the 1st leg down, but they hope that the rally from the October high was the 2nd leg of a double top and the start of a huge bear trend. More likely, this is a bear trap and the Emini will have to test back up within a week or two. If it then turns down again, it will have formed a double top with last week’s high and a bigger double top with the July all-time high. The bears at that point would have a higher probability of starting a bear trend that could last for months and fall down to the 1600 double top on the monthly chart.
The weekly chart had 6 consecutive bull bars, which is both a sign of strength and a climax. The first pullback will probably be bought, and it will probably only last a week or two. This week is the first pullback, but it is sharper than the bulls wanted and it was therefore a reminder that, as strong as the 6 week rally was, it failed to breakout above the top of the bear trend (the all-time high). Those who trade the markets for a living know that until there is a breakout, there is no breakout. Any rally, no matter how strong, is still a rally within a trading range. Traders learning how to trade the markets should realize that trading ranges can have extremely strong legs. Just look at the August selloff and the October rally. Neither resulted in a successful breakout.
Today is Friday and weekly support and resistance are more important, especially at the end of the day. The 20 week EMA was reliable support for 7 months, and it is at 2027, just 10 points below the current Globex price. Weekly resistance is at last week’s low, but that is 40 points above and probably not within reach today.
Yesterday was in a broad bear channel that accelerated down at the end of the day. Whenever there is a trend that lasts for 4 or more hours at the end of a day, the next day has a 50% chance of follow-through selling for the 1st hour or two, and a 70% chance of at least 2 hours and 2 legs of sideways to up trading, either on the open or after that initial follow-through selling.
The bears want to test the October 20 breakout point of 2031.50, which is just 4 points below the current Globex price. They want to close the gap between that high and the October 27 pullback low. They then want this selloff to test down to the October 14 bottom of the channel that began after the October 2 – 13 bull breakout. They do not mind if there is then a bounce because at that point they will have created enough selling pressure to make many traders look to sell rallies. This would increase the chances that any rally would fail and become a lower high major trend reversal.
The bulls also do not mind if the selloff continues for a 2nd week next week as long as it does not continue for a 3rd or 4th week. A two week pullback in a strong bull trend is common. If there is a pullback that has 3 or 4 strong bear trend bars on the weekly chart, the odds then favor a trading range or a bear trend instead of a pullback in a bull trend.
Forex: Best trading strategies
The 60 minute chart of the EURUSD had consecutive sell climax and it was likely to have at least a couple of legs and a couple of days up. It rallied for 2 big legs, 3 days, and 150 pips. Since the end of the US session yesterday, it has drifted back down, but the selloff so far has lacked a strong bear breakout. Until there is a strong bear breakout, day traders will look at the selling as more likely a bear leg in a 5 day trading range than a resumption of the bear trend.
On the daily chart, the momentum down is strong and the bears want a test of the April low around 1.0500. They see the 5 day trading range as a bear flag, and their momentum and their obvious target below means that probability is on their side. The bulls know that the probability of a reversal back up into the 6 month trading range is only 40% at this point, but risk/reward is on their side. They are buying and they might be using a stop below the April low. Their risk is about 250 pips. Their reward is a test back up to the October 8 top of the bear channel, which is around 1.1100, or 350 pips, or a test near the top of the 6 month trading range at around 1.1500, or 750 pips.
For day traders today, there have been several 50 pip moves up and down with abrupt reversals. This is trading range price action and it makes traders quick to take profits. The EURUSD is also in the middle of its 5 day trading range, which is a bad location to enter long or short. The bears hope that the reversal down and bear breakout over the past hour on the 60 minute chart was strong enough to lead to a test of the bottom of the trading range, which is about 50 pips below. They then want a test down to the April low.
The breakout has been only 20 pips so far, and the bears need much more sustained selling before day traders will be willing to swing short positions. Until then they will bet that any strong move up or down will fail, and they will look for reversals to scalp for 10 – 20 pips.
However, if today’s range stays within yesterday’s, these two small pushes up on the daily chart will form a bear flag going into Monday, and bears will then sell below today’s low, looking for a test down to the April higher low.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini had strong follow-through selling today on the daily chart, and now has a bear breakout and good follow-through. However, this selloff is following a 6 week rally. Because the rally was climactic, the selloff is deeper than what the bulls wanted. They will probably buy early next week and get a bounce. The selling was strong enough so that bears will look to sell the first rally, which means that the best the bulls will probably get over the next few days is a bull leg in a developing trading range. The bears hope to create a lower high major trend reversal that will lead to a breakout below the October low. The bulls want the test down to form a double bottom with the low of the current leg down, and then a new all-time high. The odds for the bulls and bears are both about 50%, which means a trading range over the next couple of weeks is likely.
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.