The Emini opened with a big gap down to around the bottom of the 60 minute trading range, and it then entered a bear channel where the follow-through was bad for the first 7 bars. This increased the chances that the selloff will evolve into a trading range within the couple of hours. It is also possible that today could become much more strongly bearish, but it will probably have to go sideways and get closer to the moving average before it will continue much lower.
The bears got a big bear breakout near the end of the 1st hour and they hope that it will change the price action to that of a strong bear trend. The selling is strong enough so that the first reversal up will probably be minor and result in a trading range. If instead there is a strong bull reversal with several consecutive bull trend bars, the bulls might have created the low of the day.
At the moment, the Emini is Always In Short, but the bulls have created several good bull bars, the selling is climactic and far below the moving average, and the Emini is at the bottom of a 60 minute bear channel and trading range. While the 1st reversal up will likely be sold, this selling will probably be followed by mostly sideways trading for at least a couple of hours. There is no sign yet that the selling has ended, but bears will sell rallies, and it is too early to buy.
My thoughts before the open: Learn how to trade legs in a trading range
The Emini continued to sell off overnight, and it is testing the July 27 higher low. The bulls will try for a double bottom today. The bears want a breakout below, and then a breakout below the July low. As you know, I expect at least a 10% correction over the next few months. However, the daily chart is still in a trading range, and there is no breakout yet. This means that every selloff, no matter how strong, will likely reverse up from the bottom of the range.
The current selloff is close enough to the bottom to reverse up today or tomorrow, despite the likely big gap down today. Since the Emini is in a trading range on all higher time frames, gaps up and down are meaningless. They have all filled, and this one probably will as well. Just because I am bearish on the monthly chart does not mean I have to be bearish on the daily or 5 minute charts. They can continue to have many strong rallies before there is finally a strong breakout below the tight trading range on the monthly chart.
Since the 5 minute chart is oversold and near support, it has more than a 50% chance of a rally today or tomorrow. When there is a big gap down, the day can be a trend from the open bull or bear trend day. Because the Emini will open far below its moving average, any initial selloff will probably be limited to an hour or so. If there is a strong reversal up on the open, the price action trading strategy is to look to swing trade a long for a possible bull reversal.
The moving average is important when there is a big gap on the open. It will be resistance if there is an opening rally. It will be a magnet if there is a selloff on the open. If the Emini sells off for the 1st hour, it will then probably have to go sideways to up for an hour or more until it gets closer to the moving average. At that point, it will decide whether to resume down or reverse up.
The most common behavior when there is a big gap up or down is to go sideways either immediately or within an hour. The institutions try to set the price of the open at what they think is a fair price for the bulls and bears. Since they tend to be right, the market tends to go sideways within the first hour.
The 60 minute Globex chart is at the bottom of a broad bull channel and it is testing the July low. The selling has been climactic. The odds favor an end to the selling and the conversion into a trading range. Because the bear channel has been so steep over the past few days, a strong reversal up on the 60 minute chart is less likely. The bulls will probably need to form a trading range for several bars, which means a day or so, before they can get a significant rally.
As long as the bulls are able to hold the Emini above the July low, which was the bottom of a strong rally, the odds are that the trading range of the past 2 weeks will continue. A trading range has bear legs and bull legs. The current bear leg will probably reverse up today or tomorrow. To change the trading range to a bear trend, the bears need a strong breakout below the July low. The probability always favors inertia, which means that reversals are more common than breakouts.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
Today’s reversal was strong, at important support (the 200 day moving average), and in an oversold market on the daily chart. This increases the chances for follow-through buying over the next few days, whether or not tomorrow reverses down and corrects a good part of today’s rally.
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The Euro was strong and the dollar was weak in overnight trading. The EURUSD is still working higher from the bottom of the trading range on the daily chart. The 5 minute chart had a spike and channel bull trend over the past 6 hours. The spike was climactic, and the channel is a wedge. The channel is now at the top of the spike.
Since the channel is weak and it is following a buy climax, it will probably evolve into a trading range today. Also, since the daily and 240 minute charts are in tight trading ranges, the rally has a series of lower highs as resistance in the next 200 pips above. If the bulls are going to get a bull trend out of this trading range, they need this rally or some rally soon to be relentlessly up.
That is not yet the case. The 5 and 60 minute charts are in bull trends, but they need to go further to move the higher time frames from trading ranges into bull trends. Since the 60 minute chart is overbought, this is a test for the bulls. Are they finally strong enough to have a bull breakout in an overbought market? If so, they will change the higher time frames from trading ranges into bull trends.
Although the 5 minute chart is in a bull trend, the spike and channel candlestick pattern will probably result in a trading range soon. Professional traders who day trade Forex markets for a living are still swing trading their longs. I have been writing about the wedge top on the daily chart of the USDCAD for over a week. It has been turning down for several days, and those learning how to trade the markets should understand that this might continue for weeks. The first support on the 240 minute chart is the July 29 higher low, which is 60 pips lower.
The overnight selling on the 5 minute chart has been strong, but it also has been in a series of consecutive sell climaxes. The odds are that it will stop soon and evolve into a trading range. Although the 5 minute chart is still Always In Short, the trading range, if it forms, will create day trading opportunities for bulls and bears for Forex scalping. The 60 minute chart is at the bottom of a broad bear channel, and the 60 minute bears will probably take some profits here. The overnight selling in the USDJPY has also been in a spike and channel sell climax type of candle stick pattern, and the selloff is testing last week’s lows. The sell climax will probably evolve into a trading range that will last at least a couple of hours.
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.