The Emini opened just below yesterday’s high and pulled back. The gap above yesterday’s high is resistance and the 15 minute moving average was resistance yesterday and is support today. The Emini had an early tight trading range with many dojis, and yesterday was a big trading range day. This is a trading range open, and it is near resistance. Today will probably have a lot of trading range price action, but there is a lot of room within yesterday’s range for swing trades.
Trading range price action lowers probabilities. Big bars increase risk. Today might have a lot of limit order trading so traders have to be selective about taking stop entries and about swing trading. They should try to wait for 2nd entries with good signal bars, or for strong breakouts with follow-through. Without these, the odds are that breakouts will fail and the market will be in another trading range.
While it is possible that today rallies above Friday’s low and closes the gap, and today could be a big bull trend day, the odds are against it. It is also possible for today to trade all of the way down to yesterday’s close. However, today follows a climactic reversal, which makes a trading range likely, and it has had a trading range open. The odds are that today will have mostly trading range price action.
Pre-Open Market Analysis for August 25, 2015
S&P 500 Emini: Learn how to trade a climax
Yesterday was the most unusual day of the past 5 years, and it will be conspicuous on charts for many years to come. I have been writing all year that the upside in the stock market was limited and that there was an 80% chance of a 10 to 20% selloff to below the monthly moving average, where it would find buyers. I have also said many times that it could be very fast because most of the bulls were momentum traders who will exit very quickly at the 1st sign of a reversal. So what happens next?
The Emini is trading right around the monthly moving average, and it probably will stay in this area for at least a week. The month ends on Monday and the Emini will probably be around the moving average at that time.
Yesterday’s range was bigger than the height of the entire 7 month trading range that preceded it. The bulls reversed the market up yesterday from above the October low, which is a sign of strength. The bears saw yesterday as a gift and bought back some of their shorts. They want to sell again, but might wait for a TBTL (10 bars, 2 legs) sideways to up move to near the daily moving average before selling again. This absence of bears and the presence of bulls who are buying for a trade up in an oversold market increase the chances of at pullback from the selloff.
If this is going to be a bear trend on the monthly chart, the odds of a brief pullback are greater. Since I think the bear trend on the daily chart is more likely to become a bull flag on the monthly chart, which is still strongly bullish, I think the odds of a crash or a big selloff near term are small. The market is finding support at the monthly moving average and it might pause there for a few a bar or two on the monthly chart. This means that we might stay sideways for a couple of months with the bottom of the range being around the October low and the top of the range being around the bottom of the 7 month trading range above. There will be big bull and bear trend days within the range, but the follow-through will probably be bad, and both bulls and bears will be disappointed by the follow-through after strong days.
As I am writing, the Emini is up about 70 points from yesterday’s close. While it might close the gap, I think it is more likely that it will not. This means that it will open near what will probably become the high of the day, and disappoint the bulls. The day trading tip is to be ready for an early top and reversal down for a swing. However, if it strongly breaks above yesterday’s high and closes the gap, traders should not be in denial. They should buy for a swing trade up.
Even though an inside day is likely today, its range might still be 50 points or more. That will be small compared to yesterday, but big compared to the past year. Trades will still need to trade small. The price action candlestick patterns will be the same as they always are, but the bars will probably be big. A day trader should only trade if he is comfortable using the appropriate stop, which might be far. A broad trading range should begin to become evident on the 60 minute candlestick chart.
Forex: Best trading strategies
I mentioned before the open yesterday that the Forex markets were climactic over the weekend and that they were likely to reverse for at least a day or two. The reversals on the 240 minute candlestick charts have continued overnight. The biggest climaxes were the buy climaxes in the EURUSD and EURCAD and the sell climax in the USDJPY. Although V tops and bottoms theoretically can happen, most are usually some other pattern, and most require at least a little trading range price action before a reversal can take place. This means that most abrupt climaxes (big up and then big down, or big down and then big up) generate confusion and not reversals. Confusion is a hallmark of a trading range, and that is what is likely to form after a climax. As the trading range develops, both bulls and bears see patterns in their direction. The market is then in breakout mode. After 20 or 30 bars, the trend is so far in the past that the probability that it will resume falls to about the same as the probability of a reversal.
For example, the USDJPY 240 minute and daily charts had a sell climax. However, the market reversed up sharply from the bottom of the year long trading range and is now back in the middle of the February to April tight trading range. What is it likely to do? It will probably do what it did here earlier and enter a trading range again. Within the range, bulls will see a major trend reversal. Bears will see bear flags. As bars get added to the range, the probability for a 2nd leg down drops to about the same as the probability of a reversal.
The same is true of the buy climax on the daily chart of the EURUSD. Bears see it as a failed breakout above the year long trading range. Bulls see yesterday’s selloff as a pullback from that breakout, and they expect at least one more leg up. The price action is confusing, and the result usually is that the market has to go sideways since the bears are now just about as strong as the bulls. Traders know that because otherwise the strong reversal down would not have happened.
The EURCAD had an extremely strong bull breakout and the reversal down was less strong. Also, the 3 day rally was a bull breakout above a bull channel, which usually fails within about 5 bars. However, when the breakout is as big as this breakout was, the odds are that the rally will continue for about a measured move up. The rally came very close to that target, which means that if there is a 2nd leg up, it might be small and create a small double top.
This rally is also so far only a test of the 2014 lower high. The bears want a double top. The bulls want a breakout. The rally was strong enough so that the 1st reversal down will probably fail and be followed by a test up. The reversal down was strong enough to make a trading range likely for a few weeks.
The 5 minute chart of the EURCAD was in a broad bear channel since the buy climax yesterday. With a trading range likely, this bear channel will probably be followed by a bull channel over the next few days. The trading range will probably be at least 300 pips tall, which means that Forex swing traders will have opportunities up and down. Those who trade Forex markets for a living will simply wait for reversal patterns or for strong breakouts and then place their swing trades.
The 5 minute chart of the EURUSD has also been in a broad bear channel, and online daytraders will take trades in both directions. The trading range so far is only about 100 pips tall, which means that day traders will scalp more and swing trade less.
The 5 minute chart of the USDJPY has been in a bull channel for two days. Traders learning how to trade the markets can take long swing trades, or look for a top today or tomorrow on the 5 minute chart for a swing trade down. The rally is in its 3rd leg on the 5 and 60 minute charts, which is a wedge bear flag. The odds favor a test down soon for a day or two.
All financial markets had climaxes and will probably be sideways for many days and possibly weeks.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini gapped up, but did not get above yesterday’s high and became a trend from the open bear trend. It was a trending trading range day for most of the day, but ended with a Sell The Close bear trend that fell all of the way down to yesterday’s close.
When there is a series of consecutive sell climaxes into the close, there is a 70% chance that tomorrow will have at least a 2 hour, 2 legged sideways to up move. There is often follow-through selling for the first hour, and with today forming a bear inside bar, it created a sell setup going into tomorrow. Tomorrow will try to trigger the sell signal by falling below today’s low. However, because of the sell climaxes today, the odds are that the selloff with fail within the 1st 2 hours.
A crash is very unlikely, and the Emini should begin to form a trading range on the daily chart. A trading range means that big moves up and down disappoint trend traders and are followed by reversals. This is the most likely price action for at least a few days and possibly for weeks.
The bears had a double top today. The bulls will try for a 60 minute double bottom tomorrow. While it is possible for the Emini to fall below yesterday’s higher low, which is the neckline for the 60 minute double top bear flag, there will probably be buyers below because the selling of the past week has been so climactic. Also, there will be buyers around the monthly moving average. The odds are that the selloff will have a 2nd leg down and a measured move down, but the 2nd leg will probably begin after a trading range or rally that could last for weeks. The Emini is deciding if the bottom of the trading range is in yet. If it is not, it will probably be in within a few days.
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.