The Emini reversed down from yesterday’s wedge top and fell for 4 consecutive bars. It was Always In Short, but at the apex of a tight 60 minute triangle and at all 3 moving averages, which are flat. This is a bear leg within a trading range, and it is less likely the start of a bear trend. However, the initial selling was strong enough to make it likely that the 1st leg up will not go to a new high, and the best the bulls will get over the next hour or two is a trading range. In trading ranges, pullbacks from legs can be deep, and the rally might test close to the high before the bears try for their 2nd leg down. The reversal up was strong enough to reduce the chances of a big bear trend day, especially when the market has been in a tight trading range for a couple of weeks. The selloff was deep enough to make a bull trend day unlikely.
The price action lacks conviction and this makes a lot of trading range price action probable today.
Pre-Open Market Analysis
S&P 500 Emini: How to trade online when the price action is sideways
The price action trading strategy for this week is to be ready for a big move at 11 a.m. on Thursday when the Fed will probably raise interest rates for the first time in years. This is fascinating and there are both bull and bear arguments. The bulls think that the interest rate hike is a sign that the Fed thinks the economy is strong. The bears argue that the stock market has been lifted by the Fed printing money and the market will have to be repriced lower if the easy money stops.
If the Fed postpones the rate hike, the bulls will argue that the Fed is continuing to support the stock market and that it cannot fall. That means more sideways to up. The bears will argue that the Fed is afraid to raise rates because the economy is weak. If it is weak, earnings will be weak and stock prices will fall.
This is all nonsense, and all that matters is the final vote by all of the institutional dollars. If more buy, the market will go up. If more sell, the Emini price action will be bearish. In either case, we will see their decision on the charts, and online day traders should trade in the direction of the breakout, If the breakout fails and reverses, they will then trade in the opposite direction.
Professional traders never care or think much about the direction until they see it. It is very important to be open to anything and just accept it and not question it. That is the best way to be consistently profitable as a traders. Before any big move, always assume that the market is where because the bulls and bears are always balanced. Since they are balanced, the breakout has an equal chance of being up or down.
It does not matter if TV puts a professorial, highly credentialed expert from a major firm on before the report who confidently says that the market will go up or down. What they will not show is the equally qualified expert from another firm who gives very convincing arguments that the exact opposite will happen. If you are biased by the person on TV, you are letting some low level producer make your trading decisions. The producer’s expertise is his ability to find a never ending collection of guests to entertain the TV audience and keep them watching. He has no trading ability. Yet, he has a tremendous influence on the decisions of day traders who are learning how to trade the markets.
Professional traders don’t bother watching because their job is to make money, not be entertained by lively discussions on TV. Also, they do not want any outside influences or distracting thoughts as they are trying to make their decisions. Finally, that idiot on TV might persuade you to buy or sell, but will not be there later in the day when you have to manage your trade. Trade management is more important than the decision to buy or sell, and you are taking a trade because of his decision without him managing your trade, you will lose money. Even if he did manage your trade, you would lose money because he is an economist, not a trader, and traders eat economists for lunch.
The price action is on the daily chart is neutral going into the report. There is a 50% chance of a breakout above the 3 week trading range, and a 50% chance of a a breakout below. The daily chart is in a bear trend. If there is a bull breakout, it probably will fail below the 7 month trading range around 2050 and form a lower high major trend reversal. If it breaks above that, it will probably fail around the all-time high and form a double top or a higher high major trend reversal. The bulls have a 40% chance of a new leg up above the all-time high without a test down to July low. The bears have a 60% chance of a 2nd leg down, but it might come after a new all-time high, although it more likely will come from a lower high, and it might even come from last week’s high.
This week will probably continue the 3 week trading range going into the Thursday rate announcement. The daily ranges have been big enough for swing traders to hold for a couple of hours at a time and make good profits. The Emini sometimes begins its breakout before the report and traders should be open to that possibility, but most traders will try to be neutral going into the report.
Forex: Best trading strategies
All major Forex crosses have been in trading ranges for weeks, but the ranges are big enough for swing traders to make over 100 pips per trade. The Euro has been strong for 2 weeks. The EURUSD 60 minute chart had a buy climax overnight after its 3rd push up. This is a wedge top and it will probably be followed by a TBTL pullback (Ten Bars, Two Legs, sideways to down). That means that it will probably be mostly sideways to down today. The first target for the bears is the higher low around 1.2560.
The bulls want a bull breakout above the wedge top and then a measured move up. They have less than a 40% chance of success at this point, and those trading Forex markets for a living will be be quicker to take profits going into Thursday’s US rate hike decision.
Just like the 60 minute chart is turning down from a 3rd push in a broad bull channel, the 5 minute chart has had 3 pushes down in a broad bear channel. The target for the bulls is the top of the falling wedge at around 1.345. If it gets there, it might begin its 2nd leg sideways to down on the 60 minute chart.
The 60 minute chart of the EURJPY broke below its week long bull channel. Channels usually evolve into trading ranges, which then have about a 50% chance of becoming a bull flag or a major trend reversal. Day traders who are leaning to trade the markets should watch for a reversal down from a test of the overnight high. Since the Forex cross is in a channel where pullbacks from new highs have fallen below the prior high, bulls are mostly buying pullbacks and taking profits at new highs, and bears are beginning to sell new highs for scalps, and many are scaling in, betting on the evolution from a bull channel into a trading range.
After several weeks in a tight channel on the daily chart, the USDCAD has good potential for a swing down. However, this bull flag might have one final leg up, and it could be 200 pips or more high. If it does have a bull breakout, day traders know that the odds are that it will fail and that this trading range will be the final bull flag before there is a pullback lasting a couple of weeks. The odds of a new leg up are less than 40%.
If instead there is simply a strong bear breakout, traders will either sell the breakout as it is happening, or wait to sell a pullback and swing trade their shorts for a 2nd leg down.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini has been in a tight trading range for several days and it is in the middle of its 3 week range. It is in breakout mode, and it might be waiting for Thursday’s Fed announcement before deciding on the direction of the breakout. As long as it stays sideways, online day traders will continue to look for scalps and small swing trades, and they will often use limit orders and scale in, betting that breakout attempts will not get far before reversing.
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.