Emini 3 day exhaustion gap is minor trend reversal
Pre-Open market analysis
By closing the gap above Wednesday’s high, the gap is now an exhaustion gap. Magnets below on the daily chart are the bull trend line, the 20 day EMA, and the January high.
However, an exhaustion gap is a minor reversal. The bears need follow-through selling today to increase the chances that last week’s rally was just a bull leg in a 3 week trading range.
The bulls need to form consecutive bull days. Without them, the 7 day rally will probably fail and lead to a bear leg in the 4 week trading range.
Since yesterday was a sell climax, there is only a 25 % chance of a strong bear trend day today. However, there is a 50% chance of some bear trend resumption in the 1st hour. Finally, there is a 75% chance of at least a couple hours of sideways to up trading starting by the end of the 2nd hour.
Since most days over the past several weeks have been mostly trading range days, today will likely be another mostly sideways day.
Overnight Emini Globex trading
The Emini is up 7 points in the Globex session. It will therefore gap up on the open to around the 60 minute EMA. Furthermore, it will reverse about half of yesterday’s selling.
While it is still possible to have another bear trend day today, a big gap up after 3 sideways days makes that unlikely.
Yesterday’s big bear day reduces the chances of a strong bull day. That means a trading range day is most likely. This is especially true since most days over the past several weeks have spent the majority of their time in trading ranges. The Emini still has not yet decided whether the breakout above the January high will succeed or fail.
EURUSD Forex market trading strategies
The EURUSD daily Forex chart is testing the top of the 5 month trading range. Because the August 15 bull trend reversal was strong and the context was good, the chart is now in a bull trend. Consequently, the odds favor a breakout above the range and a test of 1.20.
But, most trading range breakouts fail. I said this repeatedly after each strong leg up and down since May. While the odds now favor an eventual bull breakout, betting that any one leg will be successful is a losing strategy. Most bulls will take profits around the top of the range and this is where the bears sell. Therefore, it is more likely that there will be a reversal down over the next week than a successful breakout.
However, the August bull trend reversal was strong. As a result, this week’s rally might make a minor new high above the August or June highs before that leg down begins.
If instead the bulls get 2 or more big bull bars closing above the June high, then the breakout will probably be successful. More likely, there will be a test down to 1.15 to 1.16 over the next 2 weeks.
Overnight EURUSD Forex trading
The EURUSD 5 minute Forex chart has been in a 40 pip range overnight. Since the daily chart is now in a bull trend, the bulls want to stop the 5 month series of lower highs. Therefore, they might get a rally above 1.1750 before the next bear leg begins.
However, because the daily chart is now at the top of the 5 month range, day traders will begin to sell rallies. They will especially focus on reversals down from above the prior day’s high. They will also buy reversals up from minor prior lows, like those of the past week at around 1.16 and of the past month at around 1.15.
Since there has been only limited follow-through after bull and bear breakouts, day traders are taking quick profits of 10 – 30 pips.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini began with a huge bull bar and then entered a tight bull channel. By trading above last week’s high, it triggered a weekly buy signal. However, it then entered a tight trading range.
While the bulls want a strong breakout above last week’s high, the 3 week rally on the daily chart is weak. It is therefore more likely a bull leg in a trading range. Consequently, there will probably be a pullback within a week 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.