The Emini gapped up, but went sideways, and limit order traders made money buying and selling for the 1st many bars. This increases the chances of more trading range price action over the next couple of hours, and possibly right up to the 11 a.m. report. Traders will be cautious this morning, which increases the chances that they will take quick profits. If traders are hesitant to hold for a swing, the odds of a trading range increase.
The Emini had a bear breakout and is Always In Short, but the bears need follow-through selling if this is going to be the start of a swing down. So far, bulls and bears have both made money many times with limit orders today, and that is more common when a leg is part of a trading range. The odds are that the Emini is in the early part of a trading range. It might continue up to the report, and become very tight after 9 a.m.
The bulls want a failed bear breakout and a reversal up from the moving average and yesterday’s close. The bear channel is tight enough so that the bulls will probably need a 2nd entry buy or a strong reversal up before traders will buy.
Pre-Open Market Analysis
S&P 500 Emini: Learn how to trade when volatility is high
Before the open on Monday, I said that the odds favored a rally before the FOMC report, and that it might get back to the 2050 area, which was the middle of the two month trading range. It has had that rally. It is up 10 points in the Globex session at 2047. No matter where the market is at the time of the report, it will be perfectly neutral. There will be a 50% chance that there will be a swing up, a 50% chance that there will be a swing down, and a 50% chance that there will be a reversal within the first two bars.
The Fed has not gone 9 years without raising interest rates in my 30 years of day trading. This creates more uncertainty than usual, and increases the chances of an unusual move. Unusual can mean big, and it cal also mean one or more big reversals, like a big selloff and then a big rally, a big rally and then a big selloff, or 3 or more big swings. Traders who trade the markets for a living are open to anything and they will trade whatever they see. If the bars are so big that the stops have to be further away than a trader can comfortably use, he should wait. Those learning how to trade the markets should not be too eager to enter. I rarely enter after an FOMC report before the close of the 2nd bar.
On most FOMC days, the price action for the 1st 2 – 3 hours is like any other day. Ten years ago and before, it often entered a tight trading range after 9 a.m. until the report. Since it has been 9 years since the Fed has raised rates, this increases the chances that today will be like those days from more than 10 years ago. I will trade whatever I see, but if the range shrinks to 4 points or less, I will usually wait until at least 10 minutes after the report before trading again.
As I said, the Globex market is up 10 points. The day session is overbought on the 5 and 60 minute charts. The 2 day rally has not been very strong. All of this increases the chances of a trading range before the report. However, day traders have to be open to anything, especially on a day like today. If there is a strong breakout up or down, they will swing trade. If, as is more likely, there is bad follow-through after breakouts, as there has been for 2 days, they will be quick to take profits.
Forex: Best trading strategies
The EURUSD 60 minute chart had a wedge top after last week’s strong reversal into a bull trend. The wedge channel was likely to convert into a trading range. The selloff yesterday was strong enough so that a 2nd leg down is likely. When there is a spike and channel bull trend, like the EURUSD has had, the reversal down usually bounces at around the start of the wedge, which was around 1.0800.
A 50% pullback, if one comes, is around the 1.0800 level. There bull channel lasted 8 days. If the pullback also lasts about 8 days, and then there are several more days of a bounce, the entire correction from the December 3 bull breakout would be about a month. The correction was so unusually strong that the odds are that bears are trapped into shorts and bulls are trapped out of longs. When there are trapped traders, they look for any pullback to get free from their traps. The bears was as deep a pullback as possible on the daily chart so that they can buy back their shorts with a smaller loss. The bulls want the pullback so that they can buy with a better risk/reward ratio (their stop would be closer and their profit target at the top of the December 3 rally would be greater). When both bulls and bears are looking to buy, the odds of a 2nd leg up are 60%.
No matter how the EURUSD reacts after today’s 11 a.m. PST interest rate announcement, all of the above remains true. There is a 60% chance of a test of the December 3 high. That is the minimum target for the bulls. If the market continues up, the next target is the October 15 double top just below 1.1500.
The EURUSD has been in a tight trading range for about 20 hours. The odds are that this will continue in the US session today going into the report. It is a scalper’s market. When the report comes out, most traders who are trading a 5 minute chart should wait at least 10 minutes before taking a trade. The bars will be big so they should trade a very small size. There is a 50% chance that the first move will reverse. There is a 50% chance of a swing up, and a 50% chance of a swing down.
It is very important to trade stupid. Do not think about fundamentals. They are irrelevant over the 2 hours following the announcement. If the EURUSD is going up, traders will buy. If it is going down, they will sell. Fundamentals are useless on a 5 minute chart, and it is better to not look at the news to see what the Fed does or what TV experts say what will happen. If they knew how to trade, they would be trading, not telling you how to trade. Simply trade what is in front of you and not worry about any other information that tells you that the market cannot be doing what it is doing. Price is truth and it is all that matters.
No matter what an expert on TV says, there is always another expert who believes the exact opposite. How do you know which is right? Look at the chart. It moves in the direction of the guys with the most dollars, and it is impossible to know which side has more dollars until you see the move on the chart.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The FOMC announcement was followed by a bull trend. The day ended with a wedge top. There is room above to the resistance at the August bear trend high of 2083.50, the December 2 lower high of 2095.50, and the all-time high of 2109.25. There is still only a 50% chance of a breakout to a new all-time high before a test of the August low.
Today’s rally was a wedge, which is a climax. There might be follow-through buying for the 1st hour or two tomorrow, but there is also a 75% chance of at least 2 hours of sideways to down trading that will begin by the end of the 1st hour. It might begin on the open because today ended with a wedge top.
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.