The Emini had a gap down and traded below yesterday’s low, but the 1st 5 bars had big tails below and were in a tight trading range. The Emini reversed up from a small double bottom for a failed breakout below yesterday’s low and a possible low of the day. The rally struggled at the moving average, reducing the chances of a strong bull trend day. The bears want an opening reversal down from the moving average and then a bear trend day. They have about a 30% chance of success. More likely, the 1st reversal down will be bought and the best the bears will get is a pullback and a trading range.
Because the bulls had bad follow-through and could not break above the moving average in their 1st attempt, the Emini might have a deep pullback and then a possible trading range. While the Emini is Always In Long and the 1st reversal down will probably be bought, the reversal down might be deep and the Emini might form an early trading range. This is not strongly bullish price action, but it is strong enough to lower the probability of an Opening Reversal down from the moving average and then a bear trend day. An early trading range is more likely.
Pre-Open Market Analysis
S&P 500 Emini: Day trading tip is to look for scalping candlestick patterns
The Emini yesterday was the entry bar for the breakout above a small bull flag on the daily chart. Unlike all of the other entry bars above small bull flags over the past month, yesterday traded down instead of up. This is consistent with what I have been writing over the past 3 weeks. Although the Emini rallied strongly, the rally would probably be a bull leg in what would become a trading range. Yesterday was trading range price action, which is consistent with this evolution from a bull trend to a trading range. Although the Emini could have a minor new high above last week’s high at some point over the coming month, the probability is that it will be sideways in a 50 – 100 point range. It is probably close to the top of the range now. A reasonable initial minimum bottom is the March 10 higher low of 1958.
There is still a 30% chance that the 3 day pullback will be followed by a relentless rally to a new high instead of a trading range. Bulls are willing to buy any strong rally. However, the odds are that the Emini will have much more trading range price action on the 5 and 60 minute charts because that is what usually happens when the daily chart enters a trading range. There will be strong rallies and selloffs, but disappointing follow-through. Reversals will be more common than successful breakouts. Traders will begin to take quick profits. Instead of buying with stops above bars, they will sell with limit orders, like they did yesterday when yesterday was above the high of the day before. This change in behavior results in a trading range.
Any day can trend and day traders will always look for swing trades and measured moves whenever there is a strong reversal or a strong breakout. However, the Emini will be more likely to reverse at support and resistance than successfully break beyond it.
The day session 60 minute chart yesterday created a lower high major trend reversal (head and shoulders top), as I mentioned yesterday as a likely outcome. There is a 40% chance of a swing down over the next few days and a 60% chance that the trading range of the past 7 days continues. At some point over the next few weeks, that trading range will probably expand by having a bear breakout and a measured move down, working its way to the March 10 low.
The Emini is down 6 points in the Globex session, but the bear breakout has had weak follow-through. Yesterday was a trading range day. Traders always look for a swing trade in the 1st hour or two, but the odds are that the quiet overnight trading will continue on the open. This means that the 1st few attempts at a trend will probably fail, and day traders will end up scalping.
For a swing trade setup, bulls want either a small bull reversal bar at the bottom of early trading range or a strong bull breakout in the 1st hour. Bears want either a small bear reversal bar at the top of an early trading range or a strong bear breakout. Until either forms, traders will mostly scalp, and probably use a lot of limit order entries.
Forex: Best trading strategies
The EURUSD has a Big Up, Big Down candlestick pattern on the daily chart over the past 2 weeks, and the result is usually a trading range. A trading range on the daily chart tends to have smaller days, which means that there are fewer swing trades on the 5 minute chart.
Yesterday was a bull breakout of a 5 day bear channel, but the breakout was not big and the overnight follow-through was disappointing. Disappointment is a hallmark of a trading range. The EURUSD has been in a 50 pip range for 24 hours and a 20 pip range for the past 3 hours. The bulls want trend resumption up after their strong 2 day rally of March 16 and 17. So far, the 2 day resumption up has been weak, which is likely because of the Big Up, Big Down pattern on the daily chart.
There was a brief 30 pip rally 3 hours ago, and the bulls are hoping for a 2nd leg up soon. Unless there is a strong breakout above the 3 hour trading range, day traders will continue to scalp for 10 pips, mostly entering with limit orders. The odds still favor the bulls over the next few days because the 6 days down held above the bottom of the March 16 strong bull reversal. However, the 1st rally will probably be limited because a trading range is likely after such a deep pullback from the March 17 high.
The pain trade would be a strong bear trend day. A pain trade means that a low probability event develops and traders continue to bet against it. For example, if the day starts to sell off, bulls will keep buying because the probability is that the selloff will not last. However, if the trend becomes a small pullback bear trend, those bulls will be in pain, and the trend down could go a long way.
Pain trades only work because they are low probability events. Whenever the odds favor one side, as they do over the next couple of days for the bulls, day traders always have to be aware of a possible pain trade because it offers a big profit potential for the bears who understand what is going on.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
Today rallied strongly on some midday news. It never matters what it is. All that matters is whether a trader can make money when he sees a breakout, and he clearly could today. Because today ended with a buy climax, there is a 50% chance of follow-through buying in the first hour tomorrow, and a 75% chance of at least 2 hours of sideways to down trading starting by the end of the 2nd hour. If there is no early buying, the pullback can begin on the open.
Despite today’s strong rally, and the strong rally of the past couple of months, there is still a 60% chance that the rally of the past 3 weeks will end up as a bull leg in a trading range. The Emini is search for the top of the range, which is probably around today’s high. There is about a 30% chance that the rally will continue up to a new all-time high without forming a trading range 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.