The Emini opened with a big gap down, but had early trading range price action. This often is the start of a sideways to up move to get closer to the moving average. At that point, the Emini decides between an opening reversal down and a trend up.
The downside is probably limited until there is a test of the moving average, although it can trade down for 10 bars first. If the bulls get a strong buy signal bar, they will buy for a swing up to the moving average, and possibly for a trend up from the low of the day. Many bears will hesitate to swing trade until the market first tests closer to the moving average.
My thoughts before the open: Double top bear flag
Today will open with a big trend reversal down from yesterday’s close. Greece has nothing to do with this. There is news every day…terrorism, Russia, oil, a weak president, etc. There is always something happening whenever the market makes a move and it is naive to say that the news caused the move. The monthly chart is extremely overbought and will probably have a 20% correction this year. When it begins, there will always be many news stories happening. They have nothing to do with the reversal when it happens. It will happen because the Emini discovered that it probed too high, and then it needs to probe down to find the bottom of the monthly channel.
Whether today is the beginning of a bear trend on the daily chart remains to be seen. Over the past 3 weeks, the daily chart of the Emini has created both a double bottom bull flag and a double top lower high major trend reversal. It is in breakout mode. Today’s gap down is still within the pattern. However, it might end up being the start of the bear trend. More likely, it will just be another leg within the 3 month trading range. Traders know, however, that one of these legs will be the start of a big move on the daily chart. As you know, I have a bearish bias because of how overbought the monthly chart is, but it could get much more overbought before it corrects 20%.
A big gap increases the chances of a trend day in either direction. A big gap down has a slightly greater chance of the trend being down. When there is a big gap opening, if the Emini sometimes moves quickly down for 5 – 10 bars, it then usually go sideways for an hour or two until it gets closer to the moving average. At that point, it decides between trend resumption down and trend reversal up.
If instead of an initial selloff, there is a strong reversal up, the day can become a strong bull trend day and the trend can begin with that first bar, creating a trend from the open bull trend. Sometimes the reversal up will stall at the moving average and create an opening reversal and high of the day. In any case, a big gap is likely to have one or more swing trades.
Summary of today’s price action and what to expect tomorrow
When there is a big gap down, the market usually goes mostly sideways for an hour or two and then tests the moving average. The bulls got a breakout above the moving average and yesterday’s low, but were unable to break above the 60 minute moving average. The market then got quickly vacuumed down to the open of the day.
Tomorrow is an FOMC day and the report comes out at 11 a.m. There is usually a big move on the report, and the move sometimes quickly reverses. The market is in the middle of a 3 week trading range with both a double bottom and top. The report might be enough to create a breakout in either direction.
See the weekly update for a discussion of the weekly chart and for what to expect going into next week.