The Emini began with a strong breakout above yesterday’s 4 hour trading range, but it paused at the top of the breakout from the March FOMC report and at a leg 1 = leg 2 measured move target. When a bull trend has exceptional strength late in a trend where the pullbacks have been small, it more often represents exhaustion and less often the start of another big leg up. As strong as this opening move is, day traders will be looking for a final flag reversal for a swing trade down. However, they will wait for a 2nd entry short. It is possible that there is instead a sharp reversal down without first going sideways, but that is less likely.
The Emini is always in long and is in a strong breakout. This can be the start of a strong bull trend day. However, it is at a measured move target and at the top of a possible 3 month triangle, and it is overbought on the 5 and 60 minute charts. This means that traders will continue to buy, but will be looking for a top today or tomorrow for a day or two down.
My thoughts before the open: Swing trading a pullback
Although the Emini reversed up sharply and broke above the top of a month long trading range, it is still below the top of the 2 month and 6 month trading ranges. The 2 month trading range is a triangle. The bears need this 3rd push up to turn down and the bulls need the breakout to a new all-time high. Triangles usually contain lots of two-sided trading, but since the triangle is on the daily chart and it is 80 points tall, the 5 minute chart can still have strong trend days up and down.
If the bulls fail to have a strong upside breakout to a new all-time high soon, this 2 week rally will simply be another strong leg within the trading range. The legs within a triangle get smaller, and this leg is an appropriate size for a triangle on the daily chart. We should find out this week if the bears have allowed this rally to form as a buy vacuum test of resistance. If so, they will quickly and strongly sell. If instead the rally formed because the bulls are finally taking control, the bulls will get their breakout.
For day traders trading price action, the Emini has rallied 3 consecutive days and is near-term overbought. Traders learning how to trade the markets can see the breakout above the 60 minute double top and they know that the breakout was strong last week. When there is a strong breakout, there are usually buyers on the first pullback.
The day trading strategy for bulls and bears is to look to buy that pullback since both expect a 2nd leg up. Bulls will buy to get long. Bears will buy to exit shorts. The bears who sold up here will take profits on the test of the double top around 2080. Bears who sold 2080 and scaled in higher will get out with a small profit. Bears who sold much lower will buy to minimize their losses.
This two week rally is a spike and channel bull trend. Bull channels are bear flags. The odds favor a downside breakout and a test down to the bottom to middle of the channel, which is between 2065 and 2080. The swing trading strategy for today will be to look for a reversal down soon. There might be one more push up before the pullback begins because the rally has been so strong and the channel is so tight.
I will be looking for a top topping pattern in the price action trading room early this week, expecting the pullback. If the pullback is not too strong, then bulls will buy the pullback for the second leg up after the breakout above the 60 minute double top. If the pullback is strong, bears will look for another test of the bottom of the 3 month trading range in the 2040 area.
Summary of today’s price action and what to expect tomorrow
As I mentioned before the open the day trading strategy today was to look for the strong open to fail and then reverse down. Although the selling was relentless, it was also just a pullback to the 60 minute moving average after a very strong swing trade up on the 60 minute chart for the past several days. How much more down are day traders expecting? This is not clear. The candlestick pattern on the daily chart is a triangle and today is a good signal bar for the bears. The bulls hope that the pullback ends early tomorrow and that it is simply a test of the breakout above the 60 minute double top. The bears want today to be the start of a test down to the bottom of the triangle. Since the selling today did not have consecutive big bear trend bars, the odds at the moment favor buyers below and a test up. However, the channel down is tight enough so that online day traders tomorrow will probably need a major trend reversal buy signal before they are willing to swing trade.
See the weekly update for a discussion of the weekly chart and for what to expect going into next week.