The Emini opened with a big gap down, but then then reversed up and down with big bars. This increases the chances that the Emini will enter a trading range for a couple of hours until it gets closer to the moving average. At that point, bulls will see a bottom, like a double bottom, and bears will see a bear flag, like a double top or triangle. The Emini would be in breakout mode for a measured move up or down.
Although the Emini is Always In Short, it is far below the moving average, which reduces the chances that it will continue to sell off for more than an few bars. The bars are very big, so the stops are far. This is a difficult environment for most traders. It is easier to wait to buy above a small bull reversal bar near the bottom of the range and sell below a small bear bar near the top of the range, or wait for a strong bull reversal and then buy. Big bars far below the moving average create difficult trading for most bears, and most should wait to sell rallies, especially near the moving average.
The odds are that the Emini will be sideways to up for the next couple of hours. It might be in a trading range all day. While it is possible that it will be in a bear trend all day, if it is, it will probably be a weaker type of trend like a trending trading range day or a broad bear channel. Both usually have enough buying pressure for bulls to also make money.
The bulls hope for a bull trend day, but the selloff was big enough to make a strong bull trend day unlikely. Today will probably have a lot of 2 sided trading, whether or not there is a trend up or down, and it will most likely be mostly sideways until it gets closer to the moving average.
Pre-Open Market Analysis
S&P 500 Emini: Learn how to trade a gap down in a trading range
The Emini tested down to 1865 five times over the past 2 weeks on the daily chart. It is currently down 24 points in the Globex market with less than an hour to go before the open of the NYSE. It will probably gap below this support level on the open. The next support is the January low of 1806.24. The open with give online day traders a chance to learn how to trade a gap down in a trading range
The January reversal up from that level was a test of the bottom of the 2 year range, and it is the neck line of a 2 year head and shoulders top. The bears want a breakout below and then a measured move down to the 1500 area. While the odds of a break below 1800 are about 60%, the chance of a test down to 1500 is only about 30% at the moment.
The January sell climax was extreme. This made it likely that the bounce would have at least 2 legs up and last at least 10 bars on the daily chart. It lasted 9 bars, but the 2 legs up were in a tight trading range. That is more likely just a complex 1st leg up, which means that the selloff from the 50% retracement last week around 1940 might still be only the pullback from the 1st leg up. If so, today’s selloff would then reverse up today or tomorrow and begin the 2nd leg up.
The bulls need to hold above the January 20 bottom of the bull leg, and then begin a 2nd leg up. If the bulls succeed in reversing the Emini up today or tomorrow, they will see this low as a double bottom with the January 20 low. They then would want a breakout above last week’s 1940 high, which is the neck line of the double bottom. A measured move up from there would be near the all-time high. At the moment, the bulls have about a 30% chance of accomplishing all of this, and a 70% chance of either creating another bounce in a trading range or bear channel, or simply collapsing below the January low.
Those who trade the markets for a living will see today’s gap down as a test of the January low. They will be open to either a reversal up within the next few days or a big bear breakout and fast move down. Since the Emini is still within the January trading range, the odds are about the same for both outcomes. The bears have a slightly higher probability, given the context and the bear momentum, but until there is a bear breakout, there is no breakout, and the odds of the bear breakout on any particular leg down are still only slightly more than 50%.
Whenever there is a big gap down, there is an increased chance of a trend day in either direction. Most often, the market has to get closer to the moving average before it decides on its direction. This means that a trading range for the 1st 2 hours is more likely than a trend from the open bull or bear trend.
If there are consecutive big bear trend bars, bears will sell, but will be quick to get out on any reversal up. If there is an early buy signal bar or an early bull reversal, bull swill buy. They will be quick to take profit if the rally stalls. With both bulls and bears being quick to take profits, the odds of an early trading range that goes sideways to the moving average go up. That makes the early trading range, whether or not there is a brief breakout up or down on the open, the most likely price action for the 1st 1 – 2 hours.
Forex: Best trading strategies
Since the December 3 bull trend reversal, I have written every day that a 2nd leg up was likely, but that the pullback from that bull breakout could last a month or more. Last week was the 2nd leg up. It is possible that there will be many more legs up over the next year, but the bulls have achieved their minimum goal. The rally reached a leg 1 = leg measured move target and a measured move based on the height of the 3 month trading range. It is testing the bottom of the September trading range.
With the rally quickly reaching several resistance levels, many bulls took profits on Friday, and the profit taking continued overnight. The selloff from Friday’s high has now had 2 legs down on the 240 minute chart. The bulls see this as a High 2 bull flag (an ABC pullback from last week’s breakout). It is also testing the February 3 low. The bulls hope to rally from here and form a double bottom bull flag with that low.
The bears see the trading range since February 3 as a head and shoulders top on the 60 minute chart, and the overnight selling is breaking below the neckline, which was Friday’s low. About 60% or head and shoulders tops fail to be followed by a bear swing. More likely, there is a reversal, and then the trading range continues or there is a bull swing. Traders will find out early this week whether the EURUSD bounces from support or breaks below and then tests the next support, which is the breakout point at the 1.1000 top of the 2 month trading range.
Although the EURUSD sold off for the past 4 hours in the European session, it is near support and it has reversed up over the past hour. Friday’s trading range is a magnet and it might be the final bear flag in the selloff from Friday’s high.
Because the EURUSD is in a swing up on the daily chart, it can resume up at any time. Since last week’s rally was strong, the odds are that the EURUSD will need to go sideways for at least a couple of days before it can go down. Bull trends usually have to transition into trading ranges before they become bear trends.
The overnight sell off was strong enough so that the 60 minute chart will have to go sideways for several hours before the bulls will be able to get a resumption back up, if they are going to get a resumption up. The odds are that the EURUSD will be sideways for a day or two.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
I mentioned before the open and on the weekend that the rally that ended last week was probably the 1st of 2 legs up on the daily chart, and that the Emini might sell off for another day or two before starting the 2nd leg up. Today is a good candidate for the 2nd leg up. The rally was climactic, but the context on the daily chart is good for the bulls and tomorrow might gap up and form a 1 day island bottom.
If it does not gap up, then the sell climax at the end of today would have a 50% chance of follow-through buying for the 1st hour or two, and a 75% chance of at least a 2 hour trading that begins by the end of the 2nd hour. There is always a small chance of a major reversal down tomorrow, but traders will initially look to buy any weakness. The bears would need a strong reversal down before traders would believe that they had taken control.
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.
Al, when using a wide stop (swing stop, whether you’re swinging or scalping), do you convert all profit targets to actual risk? How do you specifically decide, when in a position, to take actual risk as opposed to intial risk?
The exception of course is when the AR is too small.
When I use wide stops, I do not pay much attention to risk. I am willing to scale in, and that can greatly increase probability to the point that AR is not important. Taking profits based on risk is good when the probability is 60% or less. When the probability is 60 – 90%, I focus more on any logical exit and assume that the math (risk and profit) are adequate.
Al, I have read one of you books and watched most of your videos. Maybe I missed it but I have to ask the question. Are the trades based on the closing price of the signal bar or the high or low of the wick? In other words, like a high one, do you place your entry at 1 tick above the close of the high one or 1 tick above the high of the wick. Your answer will be greatly appreciated.
When I am entering with stops, I use the H or L. For example, I would buy 1 tick above the high. In a strong bull trend, I often buy the close (Buy The Close bull trend).