Emini might form outside down month in February

Emini and Forex Trading Update:
Tuesday February 25, 2020

I will update again at the end of the day.

Pre-Open market analysis

I have been saying throughout February that the rally was probably not a resumption of the 5 month bull trend. Instead, it looked more like a bull leg in a trading range that began at Christmas. That is why I have been saying that traders should expect a test of the bottom of the range. That is the January 31 low.

I also said that the Emini might bounce from there and rally back to around 3300. If it reversed down again from there, there would be a head and shoulders top on the daily chart with the January 22 high as the right shoulder. Traders would then wonder if the correction will test the 3000 top of the 2 year trading range. That would be about 10% down from the high.

Yesterday got to within a few ticks of my target of the January low and then reversed up strongly. The rally failed and the day closed just below the open. It was a doji bar on the daily chart. The selling has been extreme and the Emini is at support. The Emini might be sideways to up for 2 – 3 days. But after 3 strong days down, the 1st reversal up will probably be minor.

The importance of the monthly chart

There are 4 trading days left to the month. The Emini might still trade below the January low in February. It would then be an outside down month. Furthermore, if February closes near its low, it will form a micro double top with January on the monthly chart. That would make lower prices likely in March.

Even if February does not go outside down, it will probably close below the midpoint of the month. That increases the chance of lower prices in March.

Is this the start of a bear trend? It is too early to tell. But if the bears continue to get bear bars, traders will expect a 10% correction.

I have been saying since Christmas that 2020 will be in a trading range between 2900 and 3500. Also, I said that the high of the year would probably be in the 1st quarter. Both are still likely.

Overnight Emini Globex trading

The Emini is up 13 points in the Globex session. The bulls are hoping that yesterday’s 2 legs down will form a double bottom. Since that double bottom would be 40 points tall, a measured move up from a break above the neck line would test 3300.

However, the monthly chart is very important this week. There is now a micro double top on the monthly chart. The bears retraced a month-long rally in just a few days. They are therefore strong and traders expect the month to close near its low.

Consequently, traders should not look for a strong rally far above yesterday’s neck line today. More likely, February will close around its low and the January low. Therefore, the Emini will probably be sideways for the rest of the week. That means a trading range.

The intraday ranges over the past few days have been huge. Therefore, even if the Emini goes sideways, the legs up and down will be big enough for day traders to swing trade. The bulls will look to buy reversals up from selloffs and then take profits around prior highs. The bears will sell around prior highs and take profits around prior lows. If a leg up or down is particularly strong, traders will wait for a 2nd signal before entering on the reversal.

Yesterday’s setups

Here are several reasonable stop entry setups from yesterday. I show each buy entry with a green rectangle and each sell entry with a red rectangle. I rarely also show limit order entries and entries on the close of bars. Buyers of the Brooks Trading Course and Encyclopedia of Chart Patterns have access to a much more detailed explanation of the swing trades for each day.

My goal with these charts is to present an Always In perspective. If a trader was trying to be Always In or nearly Always In a position all day, and he was not currently in the market, these entries would be logical times for him to enter.

If the risk is too big for your account, you should wait for trades with less risk or trade an alternative market like the Micro Emini.

EURUSD Forex market trading strategies

The daily chart of the EURUSD Forex market reversed up for 2 days from one tick above the bottom of the 2017 gap. There was a small parabolic wedge sell climax at the end of the 3 week selloff. A sell climax at support typically leads to 2 – 3 weeks of profit taking. Traders are deciding if the short covering has begun.

The bulls have consecutive bull bars and a micro double bottom. The context and the bull bars are enough to make at least a small 2nd leg sideways to up likely.

However, the bull bars are not especially big and they have prominent tails on top. This rally will probably not lead to significant profit taking. It is therefore likely that there will be another brief leg down to a new low within a couple weeks. That means the gap will close.

How much short covering?

Whether the rally has begun or there will be one more brief leg down does not matter. Traders expect a 2 – 3 week short covering rally that is relatively strong after such an extreme sell climax.

For example, they would like to see a rally that has at least 2 legs up. Furthermore, they think the rally will go back above the October low and possibly to the January low. That means the rally will probably go up 150 – 200 pips.

What no one yet knows is if the rally has begun. At the moment, the current rally will probably not meet those objectives. It there therefore more likely to be a small bear flag. If so, it will probably be the Final Bear Flag. That means one more leg down before there would then be the expected short covering rally to above the October low.

Overnight EURUSD Forex trading

The 5 minute chart of the EURUSD Forex market rallied a little overnight. It then sold off to a new low and bounced. This is trading range price action.

Yesterday is a sell signal bar for today. But it is the 2nd consecutive bull bar on the daily chart after a sell climax. If today trades below yesterday’s low, there will probably be more buyers than sellers there.

The bears want a better sell signal bar on the daily chart. They therefore will try to get today to close near its low. That would make today a more reliable sell signal bar. The 3 day rally would be a Low 1 bear flag. But even then, at least a 2nd leg sideways to up is likely after the micro double bottom and consecutive bull bars.

The fight today is over the close. The bears will sell rallies and try to get the day to close near its low. Since the bulls do not want a good sell signal bar on the daily chart, they will buy around the low of the day. They will try to get the day to close above its middle or at least 10 – 20 pips above the low.

Traders are exhausted. They will probably need at least a few more days to decide whether this rally is the start of a 200 pip short covering rally or just a brief bear flag. This hesitation reduces the chance of a big trend day up or down today.

Summary of today’s S&P Emini futures price action and what to expect tomorrow

Here are several reasonable stop entry setups for today. I show each buy entry with a green rectangle and each sell entry with a red rectangle. I rarely also show limit order entries and entries on the close of bars. Buyers of the Brooks Trading Course and Encyclopedia of Chart Patterns have access to a much more detailed explanation of the swing trades for each day.

My goal with these charts is to present an Always In perspective. If a trader was trying to be Always In or nearly Always In a position all day, and he was not currently in the market, these entries would be logical times for him to enter.

If the risk is too big for your account, you should wait for trades with less risk or trade an alternative market like the Micro Emini.

End of day summary

The Emini crashed today on the 5 minute chart. There were waves of selling that prevented the bulls from creating reasonable buy setups.

The Emini is now at the weekly bull trend line. Because today was such a huge bear day, there might not be many firms left to sell tomorrow at this price. That increases the chance of a rally for a day or two. Also, 3 consecutive huge bear days would be very unusual.

When a selloff from a high is huge like this, there is a 70% chance of at least a small 2nd leg sideways to down after the 1st bounce. Consequently, traders will look to sell again after a 2 – 3 day rally.

While it may not appear possible, there is a 30% chance that this is a bear trap and the Emini reverses up sharply from here back to the high. But remember, there is a 70% chance of at least a small 2nd leg down. That means the bulls will probably need a micro double bottom before they can get a rally. Furthermore, the selling has been so extreme that the best the bulls will probably get is a trading range for a month or two.

At the moment, it is likely that the selloff will go down to test the 2 year trading range high at around 3000 within a month. That would be a 10% correction, which is a popular target for reversals. However, there will probably be a bounce starting this week first.

See the weekly update for a discussion of the price action on the weekly chart and for what to expect going into next week.

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Charts use Pacific Standard Time

When I mention time, it is USA Pacific Standard Time (the Emini day session opens at 6:30 am PST, and closes at 1:15 pm PST). You can read background information on the intraday market reports on the Market Update page.

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