The Emini began with a trend from the open bull trend, but the bars were not big and they formed as a continuing of yesterday’s weak rally. Also, the rally was a bull breakout above a bull channel, which usually fails. The odds are that the Emini will transition into a trading range soon, and that his early rally will end up as a bull leg in a trading range instead of the beginning of a bull trend day.
At the moment, the Emini is Always In Long, but the rally is lacking consecutive big bull trend bars. There are many small dojis and a lot of overlapping bars. This is more typical of a leg within a trading range than in a bull trend.
Although there is no sign of a top, this rally will probably transition into a trading range within the first 2 – 3 hours and then be followed by a swing down. It is unlikely to reverse sharply down without first entering a small trading range and building some selling pressure.
It is possible for the bulls to get a strong bull breakout above a bull channel, followed by a strong bull trend day, but the probability is small.
My thoughts before the open: Candlestick pattern is a tight trading range
The Emini’s candlestick patter yesterday was a tight trading range, and day traders learning how to trade the markets should realize that this increases the chances that today will be similar. The best indication of what the bars to the right of the screen will look like is the appearance of the bars to the left. The day trading tip is to buy below bars at the bottom and buy reversals up, and sell above bars at the top and sell reversals down, and to expect breakouts to reverse. Until there is a strong breakout with follow-through, there is no breakout on the 5 minute chart.
Yesterday’s gap up and small rally created a breakout above a week long trading range. Since the follow-through buying was weak yesterday, the Emini has an increased chance of pulling back and testing the breakout point below 2080 today or tomorrow.
Also, that gap on the daily chart was important resistance, yet yesterday’s breakout did not move far above it. This type of price action often means that the Emini will spend some time going sideways around that prior support and resistance level, which is around 2083 to 2086. The bulls need strong follow-through buying today, but since the daily chart is in a trading range, the odds are that they will be disappointed, just as they have been after ever strong reversal up for 8 months.
Although the Emini closed the gap on the daily chart, it is still in the trading range. The probability of a bull breakout is still about the same as for a bear breakout, although the odds are that a bull breakout will fail and soon be followed by a bear breakout.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
Today is the 2nd consecutive bull trend day after a reversal up from the 200 day moving average and the move above the June gap down. However, because the Emini is still within its 8 month trading range, the bulls will probably be disappointed tomorrow or Friday because that is what happens in trading ranges.
This rally is a strong reversal following 10 consecutive bear bodies on the daily chart, but it is still below the top of that leg down. The bulls need a strong breakout to a new all-time high for traders to view the market differently. Until then, strong moves up and down will continue to have disappointing follow-through, and this leg will likely have a reversal down tomorrow or Thursday.
Traders always need to be ready for the opposite of what is likely, and traders learning how to trade cannot get paralyzed by denial if there is instead a strong bull trend tomorrow.
Best Forex trading strategies
The dollar has been weak overnight and it is overbought against several currencies. The selloff in the USDCAD on the 5 minute chart over the past hour is strong enough so that online day traders will look to sell rallies. It has the potential for swing trades over the next few days. The selloff is creating a bear breakout on the 60 minute chart below a wedge top in an overbought market. The odds are that it will fall for at least a couple of legs on the 60 minute chart over the next few days.
The AUDUSD is oversold on the daily chart and is forming micro double bottom after a breakout below a 60 month trading range in a bear market. This is a possible final flag reversal. I am mentioning these two Forex crosses because they offer good potential over the next couple of days. They also illustrate the principle of “Buy the rumor, sell the news.” The deal with Iran will increase the supply of oil, which should hurt oil supplying countries. However, instead of the Canadian and Australian dollars selling off, they are rallying. This is because traders anticipated the news, but overcompensated.
The USDJPY also sold off over the past hour, but this is probably just going to be a pullback from the sharp rally of the past week.
There was not much action in the Euro overnight, which means that it will offer little Forex trading for beginners unless there is a strong breakout up or down today against some other currency. Those trading Forex markets for a living will scalping Forex crosses against the Euro today.
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.