The Emini began with a trend from the open bear trend, but yesterday was a trading range, and the bulls are hoping this is just a sell vacuum test of yesterday’s low and the June low. The selloff fell below last week’s low and triggered the monthly sell signal, but the odds are that there will be buyers below that sell signal bar because it is at the bottom of a 5 day trading range.
The selloff was strong enough to make a bull trend day unlikely. However, if the bulls can create a small trading range around yesterday’s low, they might get a swing up for a couple of hours. The bears need strong follow-through selling below the June low.
At the moment, the Emini is Always In Short and it triggered a monthly sell signal. However, it had consecutive sell climaxes and it is breaking below a 5 day trading range, and most trading range breakouts fail. The odds are that it will soon enter a trading range that will last at least an hour. The bulls will try for a major trend reversal, but the upside is probably limited to a swing that does not get above the high of the day.
The bears do not mind a trading range. They, however, want trend resumption down after the trading range develops. The odds are that the Emini will be mostly sideways for at least the next two hours. If the bulls can make the trading range last at least 2 hours, then they will have close to a 50% chance of a swing up. The bears see the consecutive sell climaxes and will probably begin to take profits and wait for about 10 bars sideways to up before looking to sell again. However, there is a chance that today could become a big bear trend day and begin the trend down on the daily chart, which is currently Always In Short.
My thoughts before the open: Learn how to trade futures after a sell climax
Yesterday’s reversal up was strong, but as long as the Emini fails to get above last week’s gap down, the odds are better than 50% that the 10 – 20% correction has begun. Until there is a strong bear breakout with follow-through, most traders will correctly assume that the Emini is still within its 8 month trading range and it could stay here for many more months. However, if it does get a strong bear breakout below the trading range with follow-through, traders will look for a measured move down, and that is why I say that a 20% correction to below the October low is possible. It might even have a 50% probability.
Look at the daily chart over the past 6 months. There have been many small double tops. The current rally will probably form another. All of the prior ones have failed to create a big bear reversal. However, as long as the gap stays open, the odds are at least 50% that this one will lead to a breakout below the June low and at least a measured move down, which would take it to around my minimum goal of a poke below the monthly moving average. This is 10% down from the high.
Thursday’s high is a possible first top of a double top. Bears looking for the trend down on the daily chart see the market as a great short here. The probability of at least a profitable test down is at least 50%, and the risk to above the top of the gap is relatively small. Even if the Emini rallies above the top of the gap, the bears will look to sell again, betting on a lower high and an endless pullback in the bull trend.
The bulls need the Emini to get back above the top of the gap to damage the bear case. Without that, I think the daily chart is Always In Short, and traders who are trading the daily chart will look to sell rallies, like yesterday and any follow-through today.
Yesterday’s reversal was strong enough for the bulls to hope for some follow-through buying, but the Emini is close enough to the gap to make traders wonder if the rally was just a buy vacuum test of resistance. The bulls need a strong rally above 2086.25 (the top of the gap). The bears need a strong breakout below the June low of 2046.75 to trigger the short on the monthly chart. Until either happens, the probability favors more trading range price action.
After 10 consecutive bear bodies on the daily chart, the odds of a strong rally are small for at least s few days. Whenever the Emini goes strongly in one direction for many days, it usually has to go sideways for a few days before it can go in the opposite direction. The odds favor a trading range day today.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The reversal up was unusually strong and this increases the chance of follow-through buying tomorrow, especially in the first hour. However, the rally was not strong enough to close the gap on the daily chart, which is the magnet above that is pulling the Emini up. Also, when a day has an exceptional bull trend, like today, there is a 70% chance of a trading range or a two legged correction lasting at least a couple of hours on the next day. It can start on the open, but there is a 50% chance of follow-through buying for the first hour or two, and the correction would then begin after that.
Since the Emini is still in a 6 day tight trading range, tomorrow could trend down all day and disappoint the bulls. However, the trend up was so strong today that the bulls will be looking to buy the first reversal down, expecting that the bears will fail on their first attempt.
Best Forex trading strategies
The dollar was strong and the Euro was weak in overnight trading. The trends with the best chance of follow-through today are the ones in the tightest channels, but traders learning how to trade the Forex markets can see that all are overdone and therefore climactic and likely to pullback early today. The GBPUSD is in a tight channel bear trend, but just had 2 big bear bars and a probable exhaustive sell climax.
The EURJPY has also been in a strong bear trend, but the selling has been climactic and a transition into a complex trading range is likely.
The 60 minute chart of the USDCAD has entered a parabolic bull channel after breaking above last week’s tight trading range, and it is at the top of a larger channel. Day traders are expecting a trading range.
With all of these strong trends, when they first enter a trading range, the probability of trend resumption is greater than trend reversal. The best Forex trading strategy is to look to enter on bull backs in the direction of the trend. Once they have had strong legs in the opposite direction and the trading range has become clear, day traders will begin to take scalps in both directions. Most of the trends are strong enough to make opposite trends unlikely today.
Those trading Forex for a living can see a big bear breakout below a bear channel in the EURUSD over the past hour. Most bear breakouts below bear channels fail and reverse to the top of the channel, and this one probably will as well. The result is usually a trading range lasting at least 20 bars.
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.