The Emini had an early bull breakout, but the rally stalled at the 60 minute moving average and yesterday’s high, creating a test of the island top. It is a strong enough breakout so that the reversal down will more likely lead to a trading range than a bear trend. The bulls have not yet done enough to create a strong bull trend. However, they did do enough to make the Emini always in long.
At the moment, the odds favor either a trading range or a weak bull trend. The bulls need more follow-through buying to get well above the 60 minute moving average. They also need to get above Friday’s low. This would close the gap and weaken the bear case.
It is still possible for the Emini to reverse to below yesterday’s low and form an outside day, but the bears need a strong bear breakout to reverse this initial rally. If they do not create one, the odds favor more sideways to up. If there is a third push up on this opening rally, the bears might be able to create a parabolic wedge top. If so, that could lead to a test of yesterday’s low.
Here are my thoughts before the open. The Emini had an island top yesterday. When the Emini has a gap down and an entry bar that are not large, there is complacency. The bulls and bears agree that the price is about right. The Emini often goes sideways for a few days and then decides whether the gap is a breakaway gap and the start of a selloff, or just a pause in a bull trend. If the bull trend resumes, it often does so with a gap up, creating an island bottom. However, it is common for strong trends to enter a trading range with a series of gaps up and down. The market will probably have to test the September high at 2012.75 before it can go much higher, but it might go higher before the test comes.
The 60 minute chart had moving average gap bars yesterday (highs below the moving average), and these are the first in over a month. The odds are, these will be bought and the market will test the all-time high. However, gap bars usually lead to the final leg before a major trend reversal.
Since today will probably be a trading range day, traders will be more inclined to take quick profits, and they will look to buy low and sell high. If there is a strong breakout up or down, especially if there is follow-through, they will then trade the day like a trend day and they will look to swing at least part of their position.
Day trading outlook for tomorrow’s Emini price action
The 60 minute gap bars led to a reversal up today. However, they will also probably lead to a major trend reversal, which could trigger tomorrow, or later this week, maybe with Friday’s unemployment report. The Emini is at the top of the weekly channel and this makes the upside from here difficult.
Even if the Emini manages to get above the all-time high, bears will look for the breakout to fail. They will try to turn today’s rally and its follow-through into a major trend reversal. This would have a 40% chance of a swing down on the 60 minute chart, and a 60 minute swing would probably be from 20 – 50 points. That would also be a breakout test of the September high.
The stock market is in a bullish time of the year, but it is very overbought, and there could be extreme profit taking at any time. Bears are ready to sell a strong bear breakout, or a major trend reversal if it has a good signal bar and some selling pressure, like a wedge top. Bulls are betting that the trend will continue forever, knowing that one day they will be wrong. However, the losses on that day will be small compared to all of the profits they have made by relying on that bet for several years.
Premarket price action analysis
See yesterday’s intraday market update report for today’s premarket analysis. Once there, scroll down to the heading, Day trading outlook for tomorrow’s Emini price action.
See the weekly update for a discussion of the weekly chart and for what to expect going into next week.