The 1st 3 bars were dojis. This is tight trading range price action and it increases the chances of a lot of trading range price action today, and it increases the chances of a lot of tight trading range price action. Day traders will be willing to swing trade if there is a strong breakout up or down, but the odds are against it. A bull breakout above a bull channel reverses down 75% of the time within about 5 bars, so this gap up and rally attempt will probably not get very far before there is a swing sideways to down.
The tight bull channel is also present on the 15 minute chart so the rally could last 5 bars on that chart. There is no channel on the 60 minute chart. Yesterday’s rally was a bull breakout on the 60 minute chart, not a channel.
The bears want a strong sell signal bar for a stop entry short. If they do not get it, they will sell a strong bear reversal. The bulls want a series of strong bull bars. So far, they are not getting them. Although the Emini is Always In Long, the Emini is in a tight trading range and the breakout above the bull channel is a buy climax. The odds are that there will be a swing sideways to down that begins in the 1st hour. It might wait for 2 hours, but this is so overbought, it probably will reverse before then. The bears need bear bodies. Until they get them, the bulls are still in control and the sideways to up move can last for a couple of hours.
While it is possible that today will be a follow-through bull trend day, it is unlikely because yesterday was in a channel, and a trading range is more likely to follow a channel than is a strong bull breakout.
Pre-Open Market Analysis
S&P 500 Emini: Learn how to trade a tight trading range
The Emini was in a small pullback bull trend day yesterday. That is a very strong type of trend and it has a lower probability of a reversal on the next day. It was still a buy climax and therefore has a 60% chance of at least a couple of hours of sideways to down trading today that will begin by the end of the 2nd hour.
Today is the last full trading day before Christmas. The odds are that the Emini got close to neutral yesterday, which means that today might be mostly in a tight trading range, especially after yesterday’s buy climax. The moving average on the daily chart is at 2040, which is around the middle of the 2 month trading range and around the current Globex price.
The Globex session is up 6 points, so there probably will be a gap up on the open. There is usually at least one 4 point swing trade every day where traders can enter with a stop. Day traders will be looking for a candlestick pattern and a good signal bar in the 1st hour for the trade. Unless the move is very strong, they will be inclined to take most or all of their profit at around 4 points.
Day traders will trade whatever candlestick patterns that might appear, and those who trade the markets for a living will be prepared for swing trades, but the odds of a big trend up or down are less than usual. Day traders learning how to trade need to be careful about buying too high or selling too low today, hoping that the big swings of the past several days will continue. They probably will not.
Forex: Best trading strategies
The EURUSD has been selling off in the European session, and the selloff began 24 hours ago. As I mentioned yesterday, the 3 day rally in the EURUSD was weak and therefore probably just a leg in the 3 week trading range. I also said that because it was probably a leg within a trading range, it would probably be followed by a test down. The EURUSD is down 45 pips in the European session.
This selloff from the lower high is creating a lower high major trend reversal on the 240 minute charts, which is a type of head and shoulders top. Since 60% of head and shoulders tops fail to lead to reversals, the odds are that this one will fail. More likely, it will test the neck line around 1.0800, and the bounce. The bulls will see that bounce as the start of a breakout above a triangle and a resumption of the bull trend that began on December 3.
There is still a 60% chance of a a 2nd leg up after that strong bull trend reversal on the daily and 60 minute charts. Once it begins, traders will look for it to extend for some kind of measured move. A common type is a leg 1 = leg 2 move. The first leg was more than 400 pips. If the 2nd leg begins around 1.0800, traders will look for a rally to around 1.1200. They will also look for a measured move based on the height of the 3 week trading range. The range is about 250 pips tall. If there is a bull breakout, the projection up would be around 1.1300. If there is a bear breakout, the target would be around 1.0500, which is the bottom of the December 3 bull trend reversal.
Today is the last full trading day in the US before the Christmas break. The EURUSD is in the middle of its 3 week trading range and it is losing momentum. This is neutral price action at a time when traders will be resistant to trading very much. The US financial markets will probably be quiet today. This all increases the chances of a lot of trading range price action today. The selloff is accelerating over the past hour. However, it is testing the 1.0900 round number and the bottom of yesterday’s range, and it probably will begin to go sideways soon.
The 5 minute chart just had the biggest bear trend bar in over 100 bars. Its close is far below the low of the prior bar. When the biggest bear trend bar forms late in a bear trend, it that gap between its close and the low of the prior bar is more likely to be an exhaustion gap than a measuring gap. This means that it is more likely to close than be the start of a new leg down. The bulls will try to get a reversal up over the next hour. Their first target is the top of this sell climax bar, which is only about 10 pips up.
Remember, although the EURUSD has sold off for 24 hours, the selloff has only covered 80 pips. This will more likely be just another leg in the 3 week trading range than the start of a bear trend. If the bears relentlessly drive the market below the 1.0800 neck line of the head and shoulders top, traders will believe that the selloff will test the December 3 low. However, traders know that the EURUSD will more likely revers up at the bottom of the 3 week trading range. They see this 24 hour selloff as a sell vacuum test of support rather than a bear breakout.
The selloff over the past 3 hours was in a tight bear channel. The bulls will probably need an hour or so of a base before they will be able to begin to test back up. Because the 24 hour selloff has been in a tight bear channel, the odds are that the best the bulls will get today is a trading range and not a bear trend.
Since the selloff was climactic, the best the bears will probably get is also a trading range. Traders will look for a lot of trading range price action today, and most will probably be taking 10 – 20 pip scalps. If instead there is a strong trend, they will swing trade, but the odds are against it.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini had follow-through buying today. This is the 3rd consecutive bull trend day. The Emini is back to the middle of the 2 month trading range. The bulls want a break above the December 17 lower high, and then a new all-time high. The bears want the year to close below last year’s 2020.25 close. Those are the important magnets for next week, and the Emini might spend most of the week in between as it decides which target to test. It might test both.
Tomorrow and next week will probably be mostly within tight trading ranges, and most of the trading will be with limit orders. The 60 minute chart is overbought. The odds are that it will pull back for a couple of days. As always, the odds do not matter as much as the price action. If there is a strong trend, traders will swing trade in the direction of the trend.
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.
Merry Christmas! Great day to rewatch a few modules.
Your modules on trading with respect to times of the day are great. In forex, EUR/USD for example, the US day is 8a-5p (EST) however markets in general are 930a-430p. Do your “tips for trading the day” hold for forex? And if so, how would you break down the day?
It seems wise to look for reversal in the first hour(s) of the day..but is that 8a? Or 930a?
Thanks in advance for your thoughts,
The US session “begins” when the US financial mkts begin to move. That can be an hour or more before or after the open of the NYSE. I trade the Forex mkts exactly as I do the US mkts, except since I scalp so much in the Emini, I tend to scalp less in the Forex mkts. I pay more attention to 60 min, 240 min, and daily support and resistance. However, I could easily trade the Forex mkt all day long instead of the Emini, and I would trade them exactly the same way.