Emini pullback to bear flag after last week’s strong selloff
Pre-Open market analysis
On Monday, the Emini reversed up from the bottom of the bull channel on the daily chart and from the September 7 low. It was a good buy signal bar at this support. Yesterday triggered the buy signal on the daily chart by going above Monday’s high. However, since it was only a doji bar, it was a weak entry bar.
Yesterday is also a Low 1 bear flag sell signal bar. But, it has a bull body and it followed a strong buy signal bar. This makes it likely that there will be more buyers than sellers below yesterday’s low.
Yet, the 3 day selloff was strong. Therefore, any rally this week will probably form a lower high. Although the daily chart is still in a bull trend, it is now in a bear leg. Since the weekly chart is overbought and the 20 week EMA is not far below, a rally on the daily chart will probably form a lower high. The odds favor a test of the 20 week EMA. Furthermore, there is other support at the June high and August low at around 2800. Consequently, that is a reasonable target for the bears over the next few weeks.
The 5 minute chart reversed up yesterday from a 3 day wedge bottom. It therefore might rally more today. But, the rally will probably be limited to a few days. The Emini is probably working its way down to 2800.
The importance of this week on the weekly chart
Yesterday formed a triangle on the 5 minute chart after 3 days will big swings. Today will probably again be mostly sideways. The Emini might wait until the end of Friday to decide on how bearish this week will be.
The bears want a big bear trend bar on the weekly chart. That is unlikely at this point. At a minimum, they want the week to have a bear body and close near the low of the week. That would be below the January high and the September 7 low. It would therefore increase the chance of a move down to 2800.
The bulls always want the opposite. However, since the 20 week EMA is a magnet just below, the Emini will probably get there over the next few weeks by going sideways to down. Consequently, even if this week closes on its high, the upside is probably limited next week.
Overnight Emini Globex trading
The Emini is down 10 points in the Globex market. It therefore might gap below yesterday’s low. While that would trigger a Low 1 sell signal on the daily chart, the consecutive bull days at support make it likely that the Emini will rally up from below yesterday’s low.
The 3 days of strong selling transitioned yesterday into a trading range. The sideways trading will probably continue for the rest of the week.
But, since this selloff will probably continue down to 2800 over the next few weeks, big bear trend days are more likely to occur. That means that day traders always need to be ready for relentless selling, even when after consecutive bull days at support.
EURUSD daily Forex chart forming higher low in 6 month trading range
The EURUSD daily Forex chart reversed up yesterday from a higher low. But, yesterday was only a doji bar and the 3 week bear channel is tight. This is not a strong buy setup. It increases the chance of one more brief new low and then a wedge bottom.
Whether the rally began yesterday or will begin later this week, the tight bear channel makes a minor reversal up likely. This means a week or two up to resistance, and then a test back down. Tight bear channels usually need some type of double bottom before the bulls can take control.
Since the reversal up from the August 15 low was strong and the monthly chart is still likely to have a 2nd leg up, there is a 60% chance of a breakout above the 6 month trading range before there is a breakout below. But, trading ranges resist breaking out, as anyone can see by looking at all of the reversals over the past 6 months. There is no reason to believe that the range is about to break out up or down.
Overnight EURUSD Forex trading
The EURUSD 5 minute Forex chart has been in a 40 pip range overnight. Traders are deciding if there will be a 3rd push down to a wedge bottom before a 2 week rally. Since the 3 week selloff was climactic, but is now losing momentum, the market will probably transition more into a trading range for several days. Day traders will look for reversals and 10 – 20 pip scalps.
If there is a selloff below Monday’s low down to 1.14, the bulls will buy it, betting on a small wedge bottom. The bears will look for swing trades if there is a rally up to the October 3 sell climax high at around 1.16. The result will be a 200 pip trading range for the next couple of weeks.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini broke strongly below the 3 day wedge on the 60 minute chart. For the past several weeks, I have said that the September rally looked weak. Furthermore, I said that the Emini would therefore have a bear leg, and that it would probably fall to the 20 week EMA. It reached that target today. Finally, I said that it was close enough to a confluence of support around 2800 to make 2800 a likely target. The Emini reached that target at the end of the day today.
Tomorrow is the follow-through day after a big bear breakout. If tomorrow is a big bear day, the odds will favor a to the next major higher low on the weekly chart at around 2700. That is close enough to last year’s close of 2689.75 to make a dip below that price increasingly likely.
On the other hand, if tomorrow is a bull day, there would be a small chance of a quick reversal up next week. At the moment, the odds favor at least slightly lower prices, even if there is a bounce for a day or two. Today was such a strong bear day that there is now a 40% chance of a test of the February low.
About half of today’s selling was related to the gamma of options and the resultant hedging by options selling firms. However, today violated many technical levels, and that makes lower prices likely over the next couple of weeks.
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.