The Emini gapped above yesterday’s high, creating the possibility of a bull breakout above a 60 minute, 2 day bear flag and a measured move up. Although today began as a trend from the open bull trend, the follow-through buying was not strong. This makes a big bull trend day less likely, and an early trading range more likely. The bears will start selling new highs for scalps, and many bulls will buy pullbacks instead of breakouts. They will more likely use strong bull breakouts to take profits.
While today can still be a strong bull trend day, the early price action is more consistent with a trading range day. This means that there will probably be at least a couple of hours of sideways to down trading, and a small pullback bull trend day is not yet likely.
If the bulls begin to create as small pullback bull trend (gaps up, small pullbacks, weak but relentless rally), the bulls will be more willing to swing trade. Without that, traders will more likely begin to sell new highs, use a wide stop, and scale in higher. Bulls will buy below bars, use wide stops and sale in. Most will likely scalp.
Bears need a reversal down as a sign that the bulls are giving up. If they get it, the Emini could have a swing down for 2 – 3 hours. Neither the bulls nor the bears have done enough to make day traders believe that a trend day is likely. That makes the market go sideways. It is still Always In Long, but the odds are this is not going to be a big bull trend. Day. It will more likely be mostly trading range day and have at least on swing up and one swing down.
Pre-Open Market Analysis
S&P 500 Emini: Price action trading strategy is expect 2nd leg up
Monday was the entry bar for the breakout of the 6 day micro wedge bull flag. Although Monday had a bull body on the daily chart and it closed above the Friday signal bar high, it was a small bar with a prominent tail, and it could not get above the daily moving average.
A micro wedge on the daily chart is a wedge on the 60 and 120 minute charts. There is a 60% chance of a TBTL Ten Bar Two Leg rally on those time frames. There has already been a 14 bar rally on the 60 minute chart. The channel up was tight, and it is probably part or all of the 1st leg up of a 2 legged rally. The odds are that the first reversal down will be bought, and it will then be followed by a 2nd leg up on the 60 minute chart. There is often symmetry, and the 2nd leg is often about the same size as the first (Leg 1 = Leg 2).
The 3 week bear channel on the daily chart was tight. A breakout of a tight channel usually is a minor reversal, which means that it is followed by a test back down and then a trading range. The bear channel came after a 3 month buy climax on the daily chart. A buy climax is usually followed by at least a 2 legged pullback. This means that the 1st rally usually gets sold and is followed by a 2nd leg sideways to down.
So the 60 minute chart is likely to have 2 legs up. The 1st leg up might not yet be complete. Those 2 legs up will probably be the pullback from the 1st leg down on the daily chart, which means that once the 60 minute chart completes its correction up from the wedge bottom, the daily chart will then have a 2nd leg down from its buy climax top. There is no sign yet that the trading range of the past 2 months is about to end.
A wedge bottom is usually followed by a test of significant lower highs in the bear channel. An obvious one is the May 2nd top of the wedge at 2077.50. It was the pullback from the strong bear breakout of April 28 and 29. If the rally gets above there, the next target for the bulls is the top of the bear spike (sell climax). That is the April 27 high of 2094. The bears will try to form a double top with one of those highs. The bulls do not mind the double top as long as the bulls are able to break above that double top bear flag shortly after it forms. The bears want a breakout below the neck line of the double top, which was Friday’s low of 2033.75, and then a measured move down.
As you can see, there are many reasons on several time frames for the Emini to go up and down. Whenever there are reasonable arguments for both the bulls and the bears, the Emini is in a trading range. This will probably continue for at least a few more weeks. Over the next week or so, the Emini will pull back from its rally and probably form a higher low major trend reversal. It will then probably rally to one of the lower highs. At that point, it will decide between a double top bear flag and a bull breakout above the double top, followed by a rally to a new all-time high.
The current rally has gone up enough to make traders think the 1st of 2 legs up will complete itself today or tomorrow. The bulls see the rally as a bear flag and they know that the odds are that there will be a test back down, starting today or tomorrow. That means that the low probability event would be a bull breakout above the 2 day bear flag. That creates the potential for a Pain Trade today or tomorrow, where the market breaks above the bear flag and has a measured move up when the odds favor a pullback and then a 2nd leg up. If today begins to rally and forms gaps in the rally, a pain trade is probably under way. Online day traders should not deny the rally. Instead, they should look for reasons to swing part of their long trade.
The Globex market had a Big Up/Big Down candlestick pattern overnight. When there is a big reversal down from a buy climax, the Emini usually enters a trading range for many bars. The patter is clear on the 15 minute chart. The pattern is small on the 60 minute chart. The Emini will probably form a trading range on the 15 minute chart for about 10 bars. Ten bars on the 15 minute chart is 2 – 3 hours on the 5 minute chart.
The Emini will probably gap up on the open. The rally is probably overdone, given the small size of the micro wedge bottom on the daily chart. This increases the chances of a pullback starting today or tomorrow.
Forex: Best trading strategies
The weekly chart of the EURUSD has a wedge top, which will probably be followed by a could legs down. Last week was the sell signal bar and this week is the sell entry bar. The bears was a big bear bar closing on its low. There is still a lot of time left in the week, and the bears might still get a strong sell entry bar, but there is no sign of it yet.
The EURUSD had doji candlestick patterns yesterday and the day before. The two day buy climax of April 29 and May 2 is important because many bulls put stops below the bottom of those 2 bars. This means that the April 29 low of 1.1344 is a magnet. It probably will be hit this week, although a test up could begin at any point, without 1st hitting support.
That buy climax was followed by a strong bear reversal bar last week. This created a Big Up, Big Down candlestick pattern. The bulls and bears are confused and lack conviction, and the result is usually a trading range. Neither believes the market will move very far over the next couple of weeks so they both will buy low, sell high, and scalp, which creates a trading range.
The 1st reversal up will probably be sold, creating a lower high. The selloff will probably find support around the bottom of the 1st leg down. That bottom is currently yesterday’s low, but it may fall a little further before there is a rally to a lower high.
The trading range often contains both a double top (the May 3 bull swing high and the rally that will probably begin this week) and a double bottom. The double bottom will be formed by the low of the current leg down, and the low that follows the selloff from the likely rally over that will probably begin in the next few days.
With the double top and double bottom, the EURUSD Forex chart will be in breakout mode. The probability of a successful bull breakout will be about the same as a successful bear breakout.
The EURUSD Forex market has had a moderately strong 2 day rally from a double bottom on the daily chart. Friday was the buy signal bar, and it was a small bear doji. That is a low probability bottom, even though it was a double bottom with the March 29 low. The selloff of April 28 and 29 was stronger that the reversal up that began yesterday. This increases the chances that this rally will end today or tomorrow and test back down. When there are both reasonable buy and sell signals on different time frames, traders tend to take profits soon. This usually results in a trading range. which is likely to begin today or tomorrow.
The sell off from the May 3 high on the 60 minute chart has been in a tight channel. It also has had 2 legs down and it around a measured move down. It is also close to the magnet of the April 29 low, That day was a buy climax. The low of a buy climax is a magnet when the buy climax is big and comes 20 or more bars in a bull trend.
The EURUSD has also had 6 days down and it is around a 50% pullback from the April 25 rally. The bear bars are not very big. After a buy climax, 6 days down, and a weekly sell signal, the odds are that the 1st reversal up over the next few days will be sold and a trading range will begin to form. Although the 5 minute chart has been in a 40 pip trading range over night, most of the trading was in a 30 pip range. Most day traders will scalp for 10 pips until there is a strong breakout up or down.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini rallied relentlessly in a small pullback bull trend. It tested above the bear trend line and the May 2 lower high. The bears want a double top with that high, and the bulls want a bull breakout above the high.
Since the 3 day rally has been relentless, it has been climactic. This makes a pullback likely tomorrow. Will the bears get a selloff to below last week’s low, which is the neckline of the double top? The rally followed a wedge bottom, so the odds are the pullback will be bought and it will be followed by a 2nd leg sideways to up. This means that the best the bears probably can get over the next couple of days is a trading range.
While the rally can continue up to a new all=time high, the odds are that it will pull back tomorrow because the 3 day rally is unsustainable and therefore climactic. When a day ends with a buy climax, there is a 50% chance of follow-though buying that can last 1 – 2 hours. There is a 75% chance of at least a 2 hour trading range that starts by the end of the 2nd hour.
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.