The Emini broke below yesterday’s bull channel and found support at the beginning of the channel. It formed an early tight trading range, which increases the chances that today’s price action will resemble that of the past 2 days. If so, day traders will mostly scalp, and many will enter with limit orders.
While it is still possible for the day to become a strong trend day, this early price action makes a trading range day more likely. Until there is a strong breakout up or down, day traders will continue to scalp. Because the 2 day rally was climactic, another bull trend day is unlikely, so the odds favor either a weak bear trend or a trading range. The bears want a test of the 60 minute moving average, but if they get it, it will probably come from a weak bear channel, and most bears will repeatedly scalp instead of swinging.
Pre-Open Market Analysis
S&P 500 Emini: Learn how to trade when the Emini is overbought
The Emini has rallied for 6 days in its 2 month trading range, and it is now near the top. It is overbought on the daily chart. It broke above the December 17 lower high. Because it is in a trading range, the odds are that the breakout will fail and be followed by a reversal down for at least a couple of days. Remember, during the strong sell off on December 18, I said that it would probably fail to lead to a bear trend. I have said during each strong leg up and down that failed breakouts and reversals were more likely than a breakout into a trend. The same is true here. While a breakout will come, 80% of breakout attempts fail.
Right now, the important force is the end of the year. The monthly and yearly charts close tomorrow. Bulls and bears are trying to create signs of strength. The bulls want the month and year to close on their highs. It is very unlikely that the bears will get their goal of a close on the low of the bars. Instead, they now only want the bars to be less bullish. They will try to create a pullback between now and tomorrow’s close to put a tail on the top of the monthly and yearly candles so that traders will see both as less bullish.
Yesterday and the day before both were in small pullback bull trends. This is a strong type of trend, but all strong trends are climaxes, and eventually are followed by at least a couple of legs down. The 60 minute chart had bar on Monday that gapped below the moving average. This is usually followed by one more rally and then an attempt at a major trend reversal. The 2 day rally might soon create a higher high major trend reversal on the 60 minute chart. Most are followed by trading ranges, but 40% are followed by a swing down. About 20% are followed by a strong bull breakout. The odds are for a pullback today or tomorrow, despite the strong 6 day rally.
Online day traders will trade momentum. If it is up, those who trade the market for a living will look to swing trade their longs. If there is a strong bear breakout, they will swing trade their shorts. If any swing up or down is weak, trend traders will scalp part or all of their position, and countertrend traders will fade moves. They will sell strength and buy weakness for scalps.
The Emini is down 5 points in the Globex market. A bull channel is a bear flag. Yesterday was in a bull channel so there is a 75% chance of a bear breakout today. If the breakout is strong, it could lead to a swing down. If it is weak, then a trading range for a couple of hours is more likely.
Forex: Best trading strategies
The EURUSD daily chart has been in a trading range for a month after the December 3 bull trend reversal. With yesterday’s push down, the trading range is now a triangle. The swing down might test the 1.0800 bottom of the range, or it might pause here in the middle of the range. If it pauses, traders will view the range as a sideways triangle. If it instead tests the bottom of the range, it would create a descending triangle.
The EURUSD is also in a year long trading range. This means that pullbacks can be very deep. The EURUSD daily chart could easily break below the month long trading range and test down to near the December 3 low. None of the possibilities alters the overriding fact that the December 3 bull breakout was so exceptionally strong that a 2nd leg up is likely. What traders do not yet know is where the bottom of that leg will be. Will it begin around the 1.0800 bottom of the month long trading range, or from a much lower level? For the bears to take control again on the daily chart, they need either a breakout below the December 3 low, or a series of strong bear trend bars that break below the month long trading range. Without either of these, the odds still favor a 2nd leg up.
The overnight trading has been in a tight trading range. The bulls are trying to create a double bottom on the 60 minute chart around 1.0900, and the bears want a test down to the 1.0800 bottom of the month long trading range. Most of the day trading on the 5 minute chart for the past couple of weeks has been scalping for 10 – 20 pips, and often the best entry was a limit order, betting on a failed breakout. Most traders cannot trade this way and need to wait either for a clear reversal or a strong breakout. Alternatively, they can trade the 60 or 240 minute charts for bigger scalps.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
As I said yesterday, today was likely to have a pullback after 6 days up in a trading range. Tomorrow is the last day of the month and of the year. The most important price is the close of last year at 2020.25, but that is probably beyond reach for tomorrow. Tomorrow will probably spend a lot of time in a tight trading range.
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.
Thanks for your analysis on the EURUSD as always Al!
Interesting that you mention the 60 minute charts might be a better alternative to the 5 minute when the range in the currency markets is tight. Can you elaborate on this a little when you get time please?
I take it you mean that when the hourly chart is in a TR, beginners will get chewed up trying to swing trades on the m5 chart, but could still take some trades on the h1, e.g. shorting below a small bar at the top of the range for a 20-30 pip move down to the bottom third?
I feel that the h1 chart sort of “matters more” (for want of a better expression) in the currency markets. Because they lack a market open/close like the stock market, I always found it hard to trade the m5/m15 charts before, hard to understand the price action. It was only when I started primarily watching the h1 chart to get a better idea of where we are in the market cycle that I started having some success in fx…. As opposed to trading the different thirds of the day which works so well in the indices and stocks! Also I feel the trend lines and trend channels on the hourly forex charts are very reliable.
I think the patterns and setups you teach work especially well on the m15 and h1 charts of the currency markets, in contrast to the emini where the five minute chart seems to “make more sense” (again can’t think of a better way to put it). The m5 chart of the fx pairs often seems to be choppy and unpredictable, with swing highs/lows that don’t hold (you touch on this in the forex module in the video course 2014 edition), whereas zooming out to the m15 or higher will allow one to choose a (wider) stop that won’t be run. I realise I’m rambling and this question is very ambiguous but do you see where I’m coming from?!
In general, a 5 min Forex chart can be as good as the Emini. However, the 5 min Emini is good almost all of the time. Although a trader can trade for 10 pip scalps when the Forex mkt is quiet, that is difficult because the chart prices do not show the last trade. When prices are less certain, there is less room for error. Most traders cannot trade profitably for 10 pips in a tight trading range. However, the 1, 2, and 4 hour charts are almost always good. The trade off is far fewer trades, wider stops, and smaller position sizes.