Breakout Mode before FOMC Fed interest rate hike announcement
The Emini gapped up and formed an island bottom. Yet, it quickly formed doji bars. Hence, there is confusion. This increases the chances of an early trading range. While the early reversal attempt might be the high of the day, tight bull channels usually do not reverse into bear trends. They typically evolve into trading ranges. Once there is a trading range, the bears then try to create a major trend reversal.
Since the trading range can be tall, the 1st leg down might be big. Yet, a trading range for 2 hours is more likely than a bear trend. While the bulls might continue up for the next 2 hours, this early weakness at resistance in the gap make a trading range open more likely.
Pre-Open Market Analysis
The Emini gapped down Monday and therefore created an island top. Island tops often lead to island bottoms. Therefore a gap up today would be an island bottom in a bull trend. While bullish, the overriding factor today is the 11 am FOMC announcement.
Because of the uncertainty, it could lead to a big breakout up or down. Additionally, it could lead to both and end up as a trading range day. A strong rally would erase the bearishness of the island top. A strong selloff will make traders wonder if the 5% 100 point correction has begun.
Since the Emini trades normally for the 1st 2 – 3 hours of an FOMC day, traders will not make any changes. Yet, they will change after the 11 am announcement. There is a reversal within the 1st 10 minutes after the report about 50% of the time. Therefore, traders should wait to trade until at least 10 minutes after the report before trading. If the bars are big, then stops are far. Traders should therefore either trade small or wait.
Daily and weekly bull trends, but overbought
Because the daily and weekly charts are in bull trends, the odds still favor higher prices. Yet, the daily chart has a potential final flag bull below. In addition, the rally over the past year has not had a significant pullback. Finally, the Emini has not tested the August high breakout. Therefore, the Emini will probably have a 5% pullback within the next 2 months.
Since most reversal attempts fail, the odds still favor higher prices. But, since a 5% pullback will probably come soon, traders will be quick to sell if there is a strong move down.
Overnight Emini Globex trading
I have been saying for several days that the Emini might form an island top and then an island bottom. Since it is up 6 points in the Globex market, it might gap up today. That would therefore create a 2 day island bottom.
Since all markets look for neutrality, especially before a catalyst like the FOMC meeting, that was likely to happen now. An island top followed by an island bottom qualifies as confusion and therefore neutrality.
It really does not matter if the gap closes before the 11 am announcement. This is because the Emini will probably make a big move at 11 am, and what took place over the past week will be trivial compared to today’s move.
Yesterday ended with a strong bull trend. In addition, the Emini has been in a bull channel overnight, although there were a few buy climaxes. The odds are that the gap will stay open at least until the 11 a.m. announcement. However, because yesterday’s rally was climactic, the odds are that the Emini will enter a trading range by the end of the 2nd hour.
EURUSD Forex Market Trading Strategies
The EURUSD 240 minute chart has been in a weak bull channel for 5 weeks. It has had deep pullbacks after every new high. Yet, traders keep buying every reversal attempt. It is close enough to the December 8 lower high that it might not be able to escape the magnetic pull. As a result, the bears might not be able to gain control until after this rally reaches that high. At that point, the bears will try for a double top.
Today’s FOMC announcement is unusually important because the Fed is in the process of changing its policy. Traders are uncertain of the speed of interest rate hikes. Any surprise could lead to a strong move up or down.
Overnight EURUSD Forex trading
The EURUSD has sold off for the past 2 hours. It probably will be mostly sideways going into the 11 a.m. report. Since the 1st move after an FOMC announcement reverses within 10 minutes in 50% of cases, traders should wait for at least 10 minutes before trading after the report.
Because today’s report is unusually important, the chance of a big trend after the report is greater. Furthermore, the trend could last for a week or more.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
While the Emini had a brief 2 day island bottom, it sold off from a gap up. Today’s attempt at an island bottom failed. After a series of consecutive sell climaxes, it reversed up from a failed breakout below a wedge bottom. It then entered a trading range. The FOMC announcement created no big moves.
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.