The Emini reversed down strongly from above yesterday’s high and the top of yesterday’s bull channel and became always in short. However, yesterday’s rally was strong enough so that the bears will probably need a major trend reversal if this is to turn into a bear trend day. This means that there will probably be a rally soon and then a trading range for an hour or so. The bulls hope that the trading range lasts long enough for them to create enough buying pressure to break to a new high. The selling pressure is enough to make a bull trend day unlikely. A trading range for at least an hour or two is most likely. However, some bears will swing trade since the market is always in short. The bears need to do more to create a bear trend so a trading range is likely. Then, the market will be in breakout mode and it will choose between trend resumption up and trend reversal down. However, it might just be mostly sideways for the rest of the day since yesterday was so strongly up and today has been strongly down. Big up, big down means big confusion and sideways usuually.
My thoughts before the open: Breakout of a bull flag on the daily chart
Today will probably open with a gap up, triggering the buy signal on the daily chart. Since the Emini has been in a tight trading range for 3 weeks on the daily chart and it is at the apex of a triangle, the bulls need follow-through from this bull breakout. Otherwise, it will fail and reverse down. If it does reverse down and has follow-through selling, today could become a bear trend day.
Since there have been so many sharp reversals up from support over the past 3 months and this setup is strong for the bulls, the odds favor a bull trend day. However, until traders see strong breakout buying, they will be more likely to scalp, betting that the tight trading range will prevail and that the bulls will be disappointed.
Summary of today’s price action and what to expect tomorrow
The daily chart formed a bull flag coming into today and the buy triggered on the gap up open. However, the Emini fell for a measured move down in a spike and channel bear trend. It then reversed up from a wedge bottom and closed above yesterday’s high. Although that is good for the bulls, the day was a doji day and it is therefore a weak entry bar on the daily chart.
Since the day ended with a bull channel, traders will see the rally as a bear flag. This means that the odds favor a bear breakout below the bull channel early tomorrow. From there, the trading range price action that has dominated the recent trading will probably continue. The Emini is in a critical position on the higher time frames. It is deciding whether the monthly chart will finally pull back, or if there will be one more leg up.
See the weekly update for a discussion of the weekly chart and for what to expect going into next week.