The Emini gapped up and had an opening reversal up from a brief selloff to test yesterday’s high. However, the rally has not been strong. Whenever there is a big gap, the Emini usually goes sideways for an hour or two until it gets closer to the moving average, and then it decides between trend resumption up and trend reversal down. Because this rally has been weak, it is probably a bull leg in that trading range, and less likely the start of a big bull trend day.
The bears are hoping that the rally will form a double top with last week’s high, but they need a strong reversal down. They want the week to be an inside bar on the weekly chart and hope that the rally stays below last week’s high, and then reverses down for the rest of the week. Since the risk is small for these bears, the probability is small as well, but the reward is big enough for them to take the low probability short. The probability will only go up if they can create a strong reversal down.
As I am writing, the Emini us still Always In Long, but the rally is weak and probably part of a developing trading range. Three days last week began with 2 hour trading ranges, and this might be another day like that.
Until there is a strong breakout with follow-through in either direction, traders will continue to scalp. Both bulls and bears have been able to make profitable limit order trades, and this is much more common in a trading range than in a trend.
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Although the Emini ended Friday Always In Short, it is up about 14 points in the Globex market. Last week was an outside week, which increases the chances that this week will be an inside week, creating an ioi candlestick pattern on the weekly chart. However, the reversal up on the daily chart last week was strong enough for traders to expect follow-through buying this week, especially with the all-time high just 12 points above at 2124.50. The bulls want a gap above Friday’s 2111.50 high so that Friday becomes a possible breakout gap and a sign of bullish buying pressure.
Since the gap above Friday’s high would be small, if it forms, and the Emini is still within a trading range on the daily chart, any gap up will probably close within the 1st hour or two, and the bulls will probably be disappointed. Less likely, the gap will stay open and the day will become a trend from the open bull trend, and it will close above the all-time high.
The bears want the rally to stall at Friday’s high and form a double top. Because the Emini is still in a trading range on the daily chart, daytraders are prepared for disappointed and will be ready to swing trade shorts if there is a reversal down. Anyone learning how to be a daytrader always has to be respectful of institutions holding the exact opposite view because they will be right at least 40% of the time. If there is a strong bear reversal, high probability trading will be from the short side and traders have to be open to that possibility, even if there is a big gap up.
The end of the week is the start of a reliably bullish seasonal window. The July 5 close of the Emini is above the June 25 close about 75% of the time. It is at the end of the quarter, which usually has a bullish bias, and the start of summer vacations, which has some euphoria and optimism. However, I would never place a trade on a seasonal pattern alone. Since it coincides with a possible bull breakout to a new all-time high, it slightly increases the chances of the breakout and follow-through.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
Last week’s rally was strong enough to have some follow-through this week. With the Emini within 10 – 15 points of the all-time high, it will not take much follow-through buying to create a new high. The probability is that the Emini will make a new high this week or next week. Because the monthly chart is so overbought, the odds are that the breakout will soon fail, and the reversal down should reach the monthly moving average, which is about 10% below the high.
The bears hope that this rally fails to get above the May high and forms a double top with that high. Since every breakout attempt up and down has failed for 6 months, the odds are that this one will as well. However, it will probably fail and turn down after reaching a new high.
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Traders learning how to trade the markets can see that the Forex markets were quiet overnight. The 240 minute chart of the EURUSD is forming a double top after a small breakout above last week’s triangle. It is in breakout mode, and the direction of the breakout will probably be determined by Greece. In any case, it is a 50-50 bet until there is a strong breakout with follow-through. Since the weekly chart is at the moving average for the 1st time after a strong breakout, even if there is a bull breakout on the 240 minute and daily chart, that rally will still be part of a weekly bear flag.
The daily chart of the EURJPY is in a wedge bear flag after the strong selloff in January. It has already had its 3rd push up for traders who see the rally in March as the 1st push. Others who are trading Forex markets for a living see the April and June rallies as strong enough to probably have one more push up. As long as the rally stays below the December high, it is still a bull rally in a trading range, and the odds are that it will be followed by a reversal down to at least 134.
The 5 minute charts have been in trading ranges overnight, although the selloff in the USDJPY and in the USDCHF were strong enough for traders for Forex swing trading a bounce from the short side for a 2nd leg down.
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.