The Emini opened with a big gap up and a big bull trend bar. This is another buy climax and it follows several yesterday. When the market has a series of buy climaxes and is far above the moving average, its initial upside is usually limited to 5 – 10 bars before it pulls back to near the moving average. It can get close by either reversing down or by going sideways for a couple of hours.
The bears are hoping that this rally will be like all of the others of the past month and fail. They are looking for a parabolic wedge top and an early high of the day. To convince traders that they are in control, they need a series of consecutive bear bars with closes near their low, or some topping pattern, like a major trend reversal. Because of the failed breakouts of the past month, traders will be prepared to swing trade shorts if this reverses down.
At the moment, the Emini is always in long and in a trend from the open bull trend, but the upside is probably limited because of how far it is above the moving average. However, if there is a pullback to near the moving average, bulls will look to buy. The bears need a strong reversal down to convince traders that they will be able to control the market for 2 legs and 2 hours. The bulls probably need a test near the moving average to find more buyers because the follow-through buying during the first few bars has been weak.
My thoughts before the open: Bull trend reversal or a pullback from the breakout
Yesterday’s breakout below the monthly sell signal bar triggered the short on the monthly chart. The stop for the bears is above the high of that bar, which is January’s high. The Emini reversed up from the breakout on the minute chart, but it is still on the sell signal on the monthly chart. The Emini is deciding if yesterday’s rally was a bull trend reversal or a pullback from the breakout.
The Emini has had many similar reversals up from this price level. Just as it has been unable to break strongly below the trading range of the past month, it has also been unable to break above it, and the Emini remains in breakout mode.
Yesterday’s rally was strong enough for traders to expect some follow-through buying at some point today. Also, there is plenty of room up to the top of the trading range, which is around 2060. However, because this is a trading range, bulls and bears have been disappointed by the follow-through after very strong trend days up or down, and the bulls will probably be disappointed by the follow-through from this rally as well. Until there is a strong breakout with follow-through, there is no breakout and traders will take quick profits.
Once there is a successful breakout, the market will probably move very quickly for several days because traders will be trapped into the wrong direction, betting that breakouts will continue to fail. Also, opposite traders will be trapped out because they will be hesitant to swing after all of the previous breakout attempts failed. Be ready to switch to swing trading mode on the daily chart because this trading range has lasted about a month and most trading ranges don’t last much longer than that.
Summary of today’s price action and what to expect tomorrow
The Emini continued up today after yesterday’s failed breakout below last month’s low. The next target is the 2060 double top on the daily chart. The bears want a lower high and then a breakout below yesterday’s low. That bear breakout would be a breakout below a wedge bull flag and the bears would then hold for a measured move down. The bulls want a breakout above the double top and then a measured move up.
Traders who sold below last month’s low are still short with a stop above last month’s high. However, the price action over the past 2 days is bad for their position.
See the weekly update for a discussion of the weekly chart and for what to expect going into next week.