The Emini dipped below the December 17 higher low and found buyers. The bulls want a 60 minute double bottom higher low major trend reversal. The location at the bottom of a 3 month trading range is good for the bulls, as was the reversal up after the failed bear breakout. The bull entry bar and signal bar were big enough so that the best the bears will probably get over the next hour is a trading range. The tail on the top of the entry bar make a trading range more likely than a bull trend. Although the Emini is Always In Long and the downside for the next 2 hours is probably limited, the big bear bars and the tail on top of the bull entry bar make a trading range and test of the moving average the most likely price action over the next 2 hours.
If either the bulls or bears get a strong breakout with follow-through, day traders will be more willing to swing trade. Now, they are waiting for a double top or bottom, or a wedge top or bottom, with a strong signal, or a strong breakout up or down, before swing trading. Sideways is most likely.
Pre-Open Market Analysis
S&P 500 Emini: Big gap down for Emini day traders
Today is the 1st trading day of the year, and pundits look for signs for the direction of the entire year based on the 1st hour, 1st day, 1st week, and 1st month. None of this is useful for day traders, or for anyone, for that matter, but it is entertaining.
With an hour to go before the open, the Emini is down over 30 points in the Globex session. Remember, as bullish as last week’s rally was, I said that it would more likely reverse than break above the trading range because of my 80% rule. Eighty percent of breakout attempts in a trading range, no matter how strong the attempt, will fail. The 3 day selloff has also been strong. The 3 month trading range is tight and in a triangle. It is in breakout mode, which means that the probability of the direction of the breakout is 50% up or down. Those who trade the markets for a living have been buying low, selling high, holding for a few days, and taking profits. Once there is a strong breakout, they will switch to swing trading.
The Emini will probably open with a big gap down, far below the moving average, and near 2,000. When there is a big gap down, the odds of a trend day are higher. When the big gap is down, the odds of a bear trend day are higher than the odds of a bull trend day. While there is often a strong move for the 1st hour, most of the time, the Emini enters a trading range within the 1st hour or 2, until it gets closer to the moving average. Once near the moving average, it decides between trend reversal up and trend resumption down. If the sideways to up move is not strong, the probability favors further selling.
The day can also form a strong trend from the open. With a big gap down to support (here, the bottom of a 3 month trading range), the odds of a strong trend from the open bear trend are less than for a trend from the open bull trend. If there is a big bull trend bar on the open or in the first few bars, day traders will buy above its high, hoping that it is the low of the day. They will also buy the close of the 2nd bar if it is also a bull trend bar, especially if it is big and closes on its high. There is about a 20% chance of this happening.
There is also about a 20% chance that the first bar will be a big bear trend bar closing on its low. Day traders have to be more careful sell at the bottom of a sell climax because a reversal up can happen on the next bar.
Most likely, the market will be in a trading range by the end of the 1st hour. The bears will look to sell a low r or wedge near the moving average. The bulls will look to buy a double bottom or wedge or major trend reversal. The odds of a successful 2 – 4 hour swing are higher if there is a strong signal bar, and then a strong entry bar, and strong follow-through.
Forex: Best trading strategies
I have been saying since the December 15 high in the EURUSD that the odds were that it would have 2 legs down on the daily chart and form a triangle that probably would last a month. The overnight selling has done enough for traders to see a complete triangle. The daily chart is now in breakout mode. The December 3 bull trend reversal was so strong that the odds still favor a 2nd leg up even if there is 1st a bear breakout below the triangle. As long as the selloff holds above the December 3 low, the odd still favor at least one more leg up.
I have been saying that the EURUSD would have mostly trading range price action on the 5 minute chart because that is what usually happens when the daily chart is in a trading range. However, there is now a complete pattern on the daily chart. Traders will be quick to start swing trading on all time frames if a strong breakout with follow-through unfolds.
Forex markets sometimes begin trends on the weekly chart around the first of the year. The weekly chart has been in a trading range for almost a year. If a trend up or down begins, the 1st target would be a measured move based on the 1,200 pip height of the trading range. It is too early to conclude that a trend is about to begin. Traders will watch for a strong breakout with follow-through on the daily and weekly charts. Day traders will be more willing to swing trade if the higher time frames begin to break out.
The EURUSD sold off over the past hour, with less than an hour before the NYSE opens. It is still above the overnight low. Big up, Big Down, means Big Confusion. This usually results in a trading range. However, the selloff overnight has been 100 pips. If there is a trading range, the swings might be big enough for swing trades of 50 pips. More likely, day traders will initially look for 20 pips scalps until there is clearly a trend.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
This is the start of the year so traders will talk tonight about the predictive ability of January. No one makes money from this, but it is entertaining. Here are my statistics:
The year is up 67% of the time and down 33%.
If the 1st 5 days of January are up, January is up 76% of the time. However, all months are up 65% of the time, so this is only a small improvement.
If the first 5 days are negative, Jan is down 60% of the time, instead of only 35%.
If January is up, the year is up 82% of the time, and the average gain from Feb – Dec is 8.5%.
If January is down, the average gain from Feb – Dec is only 1.7%, and the year has a 58% chance of being down, instead of the usual 33%.
In January over the past 90 years, small cap stocks are up 4% and large caps are up only 1.5%. so it is better to focus on small caps.
The day had trading range price from the 2nd bar. Almost every big trend bar up and down had bad follow-through, and limit order traders made money buying below each low and selling above each high. The bulls see today’s selloff and late reversal as a 3 month wedge bull flag on the daily chart. The bears will take some profits at the breakout below the 3 month range, but they will continue to sell tests of the top of the broad bear channel.
Unless the bears get strong follow-through selling over the next couple of days, this will reverse up, and the selloff will be simply another failed breakout in a 3 month trading range. On the daily chart, today’s bar was not a big bear trend bar, and it closed above the breakout point. This is more common when a trading range is going to continue, and less common when a bear breakout will fall for a measured move down.
The rally into the close and the reversal up from the bottom of a 3 month trading range increase the odds for more buying tomorrow, whether or not there is a pullback for the 1st hour or two.
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.