The Emini triggered an expanding triangle bear flag short after the 2nd bar of the day. However, it reversed up 4 times from the bottom of the October 5 gap, and each time it did so from a lower low. The odds are that the bulls will not wait for one more new low before buying, and instead will buy from a higher low.
At the moment, the Emini is likely to form a higher low and then have a 2nd leg up. Less likely, it will sell off to below yesterday’s low. There is no clear bottom yet. The bulls will try to create a double bottom or a wedge bottom. The bears need a breakout below yesterday’s low. The odds favor a 2nd leg up today, unless the bears get the breakout below yesterday’s low. If they do, this could be another big bear day.
The early trading and the trading at the end of yesterday was uncertain. There have been many reversals. This is a trading range in an oversold market at support. However, if it becomes a bull trend day, it will probably maintain some of the trading range price action and rally more in a channel than in a strong breakout. When that is the case, bulls are more likely to take repeated scalps, and bears will sell new highs for scalps.
Pre-Open Market Analysis
S&P 500 Emini:
The Emini sold off sharply yesterday and closed the very big and conspicuous October 5 gap on the daily chart. Part of the selling was due to a sell vacuum down to obvious support. When the Emini gets to a target very quickly, the bears see the move as a gift and many take partial or full profits. The bulls see the selling as climactic and therefore unsustainable, and think the near-term downside risk has now become small. They also see it as a test of support and a higher low. Bulls will begin to buy. With both bulls and bears looking to buy, the Emini should bounce today or tomorrow.
Both see the selloff as very strong and they know traders are trapped and need a rally. Bears who missed the selloff are hoping for a rally so that they can sell for a test back down. Bulls who bought the breakout below the 3 month trading range, but who did not quickly exit, are hoping for a rally so that they can exit with a smaller loss. With both bulls and bears looking to sell a rally, the probability is that the first reversal up will only last 2 – 3 days before there is a test back down.
The Emini is up 25 points 1 hour before he open. The odds are that it will rally for 2 – 3 days. The range was big yesterday. Bulls will be looking to swing trade if there is a strong reversal up or a bottom pattern. The range was big enough so that even if there is a rally, the bears will swing trade their short trades if there is a strong reversal down or a topping pattern.
If today is a small inside day and stay within a narrow range, it will be a limit order market. Traders will use limit orders to enter. They will sell above prior highs and strong bull closes near the top of the range. They will buy below prior lows and strong bear closes near the bottom. Many will scale in. Most will mostly scalp. The odds are that today will be a good day for traders.
Forex: Best trading strategies
I wrote yesterday that the rally on the EURUSD 60 minute chart had buy climaxes and deep pullbacks, which more often happens when the rally is part of a trading range. I said that it probably would be limited and be followed by a test back down. It traded down in the Asian and European sessions. There was a strong bear breakout 15 minutes ago on the US Unemployment report, and it is now around a 50% pullback from the 3 day rally. The selling was strong enough so that a bull trend day is not likely today when the US session opens in 45 minutes.
Because it is at a support level, bears will take partial profits and bulls will begin to look to buy. Since traders now believe that the 3 day rally was a leg in a trading range, they will begin to use trading range day trading techniques today. Traders will use limit orders to enter. They will sell above prior highs and strong bull closes near the top of the range. They will buy below prior lows and strong bear closes near the bottom. Many will scale in. Most will mostly scalp for 10 – 20 pips if the range is small. The odds are that today will be a good day for traders. If there is a small trading range bear the bottom that has a good buy signal bar, they will buy with a stop. If there is a good sell signal bar near the top, they will sell with a stop.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
Yesterday was a sell vacuum down to the October 5 gap on the daily chart. The bulls had a good chance of a bounce for 1 – 3 days. They tried for 5 hours today, forming many major trend reversal bottoms. They gave up in the final 30 minutes and the bears had a Sell The Close finish.
The sell climax at the end of the day has a 50% chance of follow-through selling for the 1st 1 – 2 hours on Monday, and a 70% chance of at least 2 hours of trading range price action. There is a 30% chance of a strong bear trend from the open. There is a consensus now that the Emini will test the September or August lows, but it might bounce first.
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.
In what kind of context would I say that the market is in breakout mode? All tight trading ranges?
Also, from my understanding, BOM implies that the odds of a bull or bear breakout are about 50-50. Therefore, is a tight trading range in a bull trend (a bull flag) still considered to be in breakout mode, since the odds favor an upside BO?
Early in a TR, whether tight or not, the odds favor the trend resuming. Each bar that is added tot the range lowers the prob. After about 20 bars, the prob is about the same for the bulls and bears, and then the mkt is in BOM (Break Out Mode).