Today’s open was similar to yesterday’s, except that yesterday had strong bulls on the day before. It is a limit order open, and it increases the chances for more trading range price action today, especially after 2 trading range days. A strong trend can come at any time, but traders need to see a strong breakout and strong follow-through before they will be willing to hold for a swing trade. When a day is a trading range day, it usually has at least one swing up and one swing down, and each lasts about 2 – 3 hours.
The Emini rallied to above yesterday’s high, but the rally was a parabolic wedge and therefore a possible high of the day. It also formed an expanding triangle top with the last hour of yesterday. However, the channel up today was tight. This reduces the chances of a sharp selloff and it makes it more likely that the bears will need to go sideways for 5 – 10 bars to create selling pressure before they have a chance of a swing down.
Because of the parabolic wedge top, the odds are that the Emini will at least go sideways to down for 5 – 10 bars soon. It will then decide if it formed a bull flag that will be followed by a bull trend day, or more likely, whether it is forming the top of a bull leg in a 3 day trading range.
Pre-Open Market Analysis
S&P 500 Emini: Learn how to trade a wedge top
The daily chart has been sideways for 3 days and it is in its 2nd push up after a strong reversal up from a test of the August low. It is just below the 7 month trading range, and therefore in an area of major resistance, which is a sell zone. What no know knows is whether this rally is the start of a bull trend reversal or simply a buy vacuum test of resistance in a big bear flag.
There is an unknowable number of bear dollars at the current price level and just above. We will soon discover just how many. If there is a huge mount of bear dollars just waiting for some starter’s whistle to blow, the bears will overwhelm the bulls and the bears will get their 2nd leg down. Some bears will not add to their positions or sell again if they have already taken profits until the rally is just below their final stop level.
For the bears to argue that this rally is part of a broad bear channel, the need the rally to reverse back down below the last major lower high. That high is the all-time high. It is impossible to know if the bulk of the bear money is waiting to trap the last bull into thinking the bull trend has returned. If so, those bears might only sell a tick or so below the all-time high. This would create a double top. If they sell anywhere below the high and succeed in turning the Emini back down, they would create a lower high major trend reversal, and the lower high would be part of a broad bear channel that began at the all-time high in July.
Although the Emini is in a bull trend, the trend is still simply a leg in a trading range and in a broad bull channel. They need a breakout to a new all-time high before everyone believes that the bear trend has ended. Even if the bulls get a new all-time high, the 7 month trading range in a very overbought monthly chart will be a strong magnet. The all-time high would unlikely be able to get very far before it failed and reversed back down. As you can tell, I am not bullish yet long term, even though the Emini has been bullish for a few weeks. Until the bulls get closer to the all-time high, the chance that they will get there is below 60%. Until it gets much closer, the chance is only 50%. If the Emini begins to sell off strongly, the probability of a 2nd leg down will quickly return to 60% well before it falls below the August low.
Because the daily and 60 minute charts are overbought, those who trade the markets for a living know that the odds are that there will be a pullback starting some time in the next week. Yes, the bulls have been strong, but everyone can see that the Emini is still in a trading range and broad bear channel. When that is the case, the odds are that any strong rally will have a pullback that will be deep enough to disappoint the bulls. This means that the odds are that it will test below 2,000 and probably down to around 1980 to last week’s low at some point over the next 2 – 3 weeks. Then, the bulls will try again for a new high.
The Emini is down 3 points in the Globex session. The 60 minute chart is in a wedge top, and it can have one or more new highs before it has a bear breakout. Day traders learning how to trade the markets need to know that he bear breakout is 75% certain at some point over the next week or so. It is still a 60 minute bull trend until there is a strong bear breakout, but time is running out, and the wedge bull channel will probably evolve into a trading range very soon.
Forex: Best trading strategies
The EURUSD rallied overnight to the target zone at the top of the 60 minute bear channel, and it is likely to evolve into a trading range for at least a couple of days. The bears hope that the 4 hour rally was just a bull trap and a lower high in a bear trend. The bulls hope it was strong enough so that the selloff of the past 2 hours will be bought and form a higher low for a 2nd leg up. Since a trading range is likely, the odds are that the selloff will stop above last night’s low and there will be a bounce, but the range is so narrow that day traders will likely be scalping. The odds are against a big move because of the trading range.
The Yen was weak overnight. The 60 minute chart of the EURUSD has rallied for the past 6 hours, but is stalling just above Friday’s high. The bears hope that this 3rd push up is the end of a bear flag after last week’s strong bear breakout. However, the overnight rally was strong enough to make a bear trend unlikely today.
The best the bears can reasonably hope to see is a trading range today on the 5 minute chart. Because the overnight buying was climactic, the odds favor a trading range today. As long as the pullback of the past 2 hours stays above 135.90 higher high from last night, the bulls have a chance of at least one more leg up for a measured move, which could be about 60 pips. If the bears break below the high, a trading range is more likely for today, and day traders will look for 10 – 20 pip scalps.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The daily chart is overbought and in a resistance area. The odds are that it will pull back for at least a few days, and the pullback should begin this week. The candlestick pattern today on the daily chart was a bear reversal bar and a sell signal bar for a 2nd entry short for the failed breakout above the September high. Since it was a doji bar, it is less reliable, but the odds are that the EMini will trade down for at least 2 – 3 days soon. Targets for the bears are last week’s higher low, the moving average, and the gap around 1950.
Bulls will buy every reversal attempt. If this rally is in fact a reversal of the bear trend, the bulls might be successful. It is more likely a rally in a trading range, and therefore it is more likely they will be disappointed by a pullback starting in the next few days.
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.
Please, can you tell your opinion about what the math on the Trader’s Equation should be for a trader that is looking to trade for 1 point a day in the E-mini?
Thanks in advance,
As long as the probability is enough to offset the risk and reward, the Trader’s Equation is good. If the risk is 2x reward, probability of winning has to be at least 2x probability of losing just to breakeven.
This is a common question. I tend to be direct so that I am clear. I do not want to be offensive, but I want everyone to understand. I asked myself the same question 25 – 30 years ago, and here was my thought at the time… “I am not asking for too much. Please, market, help a beginning trader gain some confidence. You big traders were all beginners at one time and you must have an appreciation for what I am feeling. Please help me. I am not asking for much, and it will surely make you feel good to help someone younger and less experienced. You will get the joy of welcoming someone to the family.”
I think it is far easier to try for several 2 point trades or 1 – 2 four point trades a day. Yes, the risk is greater and the probability might be less than great 1 pt scalps, but it is too much to expect someone starting out to be able to pick reasonable 1 pt scalps consistently.
I see about 40 one pt scalps a day. The more experience a trader gets, the more he sees. To trade them profitably, a trader needs to be right at least 70% of the time. Great traders are right 90% of the time when they trade these scalps. Great traders still look for 4 pt trades every day. Those are my favorites, but 1 pt scalps are far more common, and I take many more 1 – 2 pt scalps than I do 4 pt swings.
The time to start to look for 1 pt scalps is after a trader is consistently making profitable 2 – 4 pt trades. Although the idea of a 1 pt scalp seems simple, the problem is that the probability needs to be 70% just to break even because the risk is usually at least 2 pts. Also, many 1 pt scalpers use wide stops and scale in. This increases their probability (and risk), and doing that well is too much to expect when someone is not yet a strong trader.
Finally, looking for a minimum is rarely good. If a trader is hoping to make 1 pt a day, he is better off trying to make 5 pts and several trades, hoping to net 1 by the end of the day.
thank you very much for your insight.
So far i have been profitable trading for 2 point trades a day, the thing is that in order to win i have to scale in and my MAE averages around 3% of my account because i don’t place a fixed stop (i don’t know if this is ok), i only get out either when i see that price has gone too far against me or because it is the end of the day and i have to get out.
The reason why i was thinking about changing my strategy it’s because i wanted to be able to standardize my stop and keep having a high probability of winning, so i could grow exponentially. But i also know that i am not very good at timing trades and that is why i have to scale into trades.
I think that scaling in is good IFFFF a trader can control his risk, and that is difficult for traders to do starting out. The mkt is like hot plastic. Every pattern looks like it was created by Dali. I think being flexible is good.
Thank you Al,
Do you think it is ok to scale into trades that are going against me or is it better to just scale into trades that are winning positions?
It depends on where you are as a trader. If a trader is comfortable and trades small enough to contain his risk, then it is okay. If he does it a few times and loses, he should work more on other skills before trying it again.