The bulls had a strong first bar of the day, but it formed a double top with a lower high at the end of yesterday. Although the Emini fell to a new low of the day, nothing has changed from what I wrote earlier today. The odds still favor a 2 hour sideways to up reversal, but there is often some follow-through selling, as there has been. The Emini still might continue down all day, and traders have to be prepared for that. However, it is more likely that the bear channel will convert into a trading range within the first 2 hours today.
My thoughts before the open: Triangle top or a pullback from a bull breakout
The day trading strategy for today is to expect that yesterday’s bear channel will be a bull flag. There is often some follow-through selling for the first hour or two, especially since the breakout point is about 5 points below yesterday’s low, but the trading tip is that there is a 70% chance of a sideways to up reversal today that will last at least a couple of hours. A strong buy setup could offer relatively high probability trading.
Yesterday ended always in short and the trend could continue all day today, but this is unlikely. There were a number of strong bull bars in the 2nd half of the day. Also, many bulls took profits after the strong 3 day rally and are looking to buy a pullback to support. Yesterday pulled back to the 60 minute moving average and is almost down to the trend line at the bottom of 6 day bull trend channel. Finally, the breakout point from last week’s trading range is around 2080. This support will probably be enough to make the bulls buy again and for the bears to take profits, at least for a couple of hours. At that point, the market will probably be in breakout mode again.
Traders learning how to trade the markets should understand that even though yesterday’s bear trend was relentless, it was in a fairly tight channel and it lasted a long time. This is unsustainable behavior and therefore climactic. Sell climaxes usually reverse up fro at least a couple of legs and at least 10 bear. Since the trend was also tight on the 15 minute chart, the rally will probably be about 10 bars on the 15 minute chart, which means at least two legs sideways to up and lasting at least a couple of hours on the 5 minute chart.
Swing traders trading price action in the Emini S&P will look for a buy trend reversal setup in the first hour or two. Since yesterday’s bear trend channel was tight, as I mentioned in the price action trading room yesterday, the candlestick pattern today for bull swing traders will have to be relatively strong.
Until there is a major trend reversal or a wedge bull trend reversal with good buying pressure, online day traders looking to buy will mostly scalp. If there is no strong bottom, the price action trading strategy for bulls will be to wait for a strong bull breakout with strong follow-through. They will then buy the breakout or a pullback for a swing trade.
Summary of today’s price action and what to expect tomorrow
The day and a half selloff was stronger than what was likely. This Big up, big down, big up price action increases the chances of more sideways trading tomorrow for online day traders. The intraday trading strategy will be to look for candlestick patterns to buy after a couple of legs down, and to sell after a couple of legs up. Traders will be looking for scalp trading rather than swing trading, unless there is a strong breakout with follow-through in either direction.
Today was the sell entry bar on the daily chart. Instead of being a strong bear candle, today was a bull reversal bar. This is disappointing for the bears, and disappointment is one of the two driving forces that form trading ranges (confusion is the other). The Emini is near the top of the 3 month trading range. If it does not break to the upside soon, it will reverse down again and test the bottom.
See the weekly update for a discussion of the weekly chart and for what to expect going into next week.