The Emini opened with a limit order market just below yesterday’s high, and reversed down from a micro double top. Because the few big bull days of the past 3 weeks have had only small tails below and today’s selloff is already 9 points below the open, today will probably not be a big bull trend day. The past several days have been mostly sideways. Today’s selloff on the open lacked consecutive big bear bars. This makes it more likely a bear leg in what will become a trading range. However, the selling has been strong enough to make the Emini Always In Short and traders will probably sell the 1st rally.
If the Emini begins to get strong consecutive trend bars up or down, traders will believe that the early trading range price action has changed. Until then, they will be quick to take profits. Is this the start of the 3 day correction? It is too early to tell. The bears need to do more.
Pre-Open Market Analysis
S&P 500 Emini: Learn how to trade an overbought trend
The 60 minute chart of the Emini is overbought, but it is just below the bottom of the 7 month trading range, which is an important magnet. Whenever a market gets near resistance, it is drawn to the resistance. This magnetic pull often overcomes the opposite pull of the force to regress to the mean in an overbought market. It also creates the possibility of a pain trade. Those who trade the markets for a living know that there is a 75% chance that an overbought, tight bull trend will have a bear breakout and a correction lasting 10 or more bars and having 2 or more legs.
What traders learning how to trade the markets need to understand is that 75% means there is a 25% chance this will not happen, and there could instead be a bull breakout above the bull chance and above the strong resistance. Instead of a weakening bull channel evolving into a trading range, there can be a strong bull breakout that leads to another leg up. After the bull breakout, then there is another bull channel, and then a trading range, but at a much higher price.
When everyone sees something as clear, like the probability of the 60 minute bull channel evolving into a trading range, day traders should always be ready for the opposite. Since so many traders and institutions instead are in denial when a low probability even occurs, they do not take actions. The breakout often goes far before traders act.
The bears incur a lot of pain before they finally take their losses. Just as many bears are trapped into losing shorts by a surprise bull breakout, many bulls are trapped out. They saw an overbought bull trend and wanted to buy a pullback. Instead of being able to buy lower, the only option now is to buy higher. Many choose to wait more for a pullback. When it finally comes, they buy. Many bears also wait for that pullback to buy back their shorts with a smaller loss. With bulls and bears both buying the pullback, there is usually a 2nd leg up.
Will this happen? Like I said, the chance is 25%. There is a 75% chance that a pullback will begin within the next few days. Since the Emini is still in a 3 month trading range, even if the rally is also the start of a new bull trend, the odds are that the bulls will soon be disappointed by a pullback that will last more bars than they would like. When a market is in a strong bull trend, traders expect pullbacks to last only 1 – 2 days. A pullback lasting more would disappoint the bulls, and that is what is likely to happen. Will the pullback last more than 3 days, and test down to the October 5 gap? It might, and it might go lower.
However far it falls, unless the bears get a strong reversal down to start the 2nd leg down from the August bear trend, the odds are that any selloff will be just a bear leg in the current 3 month trading range. Trading ranges tend to last longer than what traders think is likely. They all eventually breakout. The rally of the past 3 weeks has been strong enough to make the odds of a bull breakout rise to 50%, which is the same as for a bear breakout. The Emini is back to being entirely neutral and in breakout mode.
The Globex session fell below yesterday’s low and found buyers. It rallied above yesterday’s high, and pulled back to just below the high. It is up about 8 points. The day session’s 60 minute chart is in a wedge bull channel. There might be one more push up before a reversal down develops. When there is a reasonable chance of one more push up, day traders have to be prepared for a surprise bear breakout before it happens. If everyone believes that a pullback is likely after one more leg up, sometimes many bears enter early, just in case there is not a chance to sell a little higher. If enough do, and if enough bulls take profits a little early, the Emini can reverse down without having a clear 3rd push up. Day traders should not be paralyzed by denial if the Emini turns down before a clear wedge develops. However, they should be ready for a move down that will probably last for several days, and it should begin within the next few days.
Forex: Best trading strategies
The EURUSD overnight was in a trading range in the middle of a 3 month triangle and a 10 month trading range on the daily chart. The range overnight was small. Day traders will continue to scalp, and many will use limit orders, buying below bars and selling above, looking for 10 pip scalps. They want a breakout, which is easier to trade, but will scalp until one forms.
The daily chart of the USDJPY was had a weak rally for 4 days and the market is back in its 2 month trading range. Although the 60 minute bull trend is intact, it is tight and near the top of the trading range. There is a 75% chance of a bear breakout below the bull channel within the next day or two. Day traders should begin to look for a candlestick pattern or a strong bear breakout to sell, looking for a swing down that will probably last at least 1 – 2 days.
The 60 minute chart of the USDCAD is turning up from the right shoulder of a head and shoulders bottoms. There is a 40% chance of a bull breakout and a measured move up, and a 60% chance that the pattern will continue sideways or test down. The selloff of the past month on the daily chart was climactic. This reduces the chances of another leg down until at least a few more days of sideways trading.
However, the daily chart is in a broad bull channel, and traders see the current selloff as just a bear leg and higher low in the broad bull channel. They would be happy to have the market go sideways more and create a stronger base. They then would like to reverse the USDCAD to another new high in the channel. The bears want any rally to form a lower high and be followed by a 2nd leg down from the September high. It is too early to know which outcome will ultimately unfold, and the chance of each is about 50%.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
Although today was not a strong bear trend, it triggered a short on the daily chart by falling below yesterday’s low after breaking about the September high. It also closed below the September high. If today is the start of the pullback, the pullback will probably last at least 3 days because that is usually what is needed to disappoint the bulls. Since the daily chart is in a trading range and it is overbought, the odds are that the bulls will be disappointed this week. Much less likely, they can get a successful bull breakout above the 60 minute channel.
Because the context is good for a selloff lasting at least 3 days and today closed on its low, tomorrow might gap down and form an island top with the October 5 gap up.
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.
When considering to take a breakout pullback entry, do you generally just compare the strength of the breakout with that of the reversal attempt? I find that I am constantly trapping myself out of good BPs and taking losing BPs.
You’ve mentioned that there is a “3-step process” to deciding whether to trade a breakout or not. Could I ask what you are referring to?
The most important consideration is the context. Is a breakout that could go for a swing a reasonable outcome, or is the breakout more likely the test of the top or bottom of a trading range? Next, traders compare the strength of the breakout with that of the reversal. For example, when looking to buy a pullback after a bull breakout, bulls do not want to see 3 consecutive bear bars right after the breakout bar. Finally, they want to see a good signal bar, especially if there is a 2nd entry, like a high 2 in a bull pullback.