The S&P Emini futures contract was likely to have a 2nd leg down after the strong selloff into yesterday’s close, and today’s open satisfied that minimum goal. Although a strong bear trend day is possible, yesterday had a 3 hour trading range after a strong rally, and this selloff is more likely a sell vacuum test of the bottom of that range. The Emini can fall further and it can enter a swing trade down, but the bears need a strong breakout with follow-through before traders believe that this will be a bear trend day.
The bulls want an opening reversal and an early low of the day. However, they need some buying pressure. Although the Emini is trying to form a small double bottom, the signal bar is weak. The bulls need a strong reversal up or a 2nd entry buy.
At the moment, the Emini futures contract is Always In short, but it is at the bottom of a trading range after a strong rally, and the odds are that this initial selling will more likely be a bear leg in a trading range.
My thoughts before the open: Learn how to trade the market at a new high
This is a very interesting time for online daytraders. The monthly chart is very overbought and will probably correct down to 1800 this year. Big corrections like this usually begin with strong buy climaxes, and yesterday is a possibility. Most reversal attempts fail, but when one works, it sometimes includes a day like yesterday. The bears need s candlestick pattern on the daily chart of the S&P Emini futures contract to set up a sell signal.
From what I say all of the time in the price action trading room, traders learning how to trade the markets know that this would be a low risk entry. The stop would be above the signal bar and the risk would therefore be the height of one bar on the daily chart. The reward, however, would be many times greater. This immediately tells traders something very important. If a bear knows that he has a trade with very little risk and a huge reward, his probability has to be very low. There has to be an institution willing to take the other side of your trade. If you get great risk/reward, he get high probability, which means that you get low probability.
So why would anyone ever sell when the probability is low? Why would anyone else buy when the risk/reward is bad? Obviously, some institutions are doing one price action trading strategy, others are doing the other, yet both are profitable. The trading tip is that traders need to know how to structure trades. Both can have positive Trader’s Equations if a trader enters with an appropriate stop and profit target. Most importantly, traders have to manage their trades well. The low probability trader (the bear in this case) needs a swing trading strategy. Although he can scalp out if his actual risk is small and his profit is at least 2 times that risk, he will probably make more money over time if he holds at least part of his trade as long as his premise is valid.
So, what is the high probability trading strategy for today for traders learning how to trade futures online? There was a buy climax yesterday and then a strong leg down into the close. It was enough of a surprise to make a 2nd leg sideways to down likely. Alternatively, if the S&P Emini futures contract rallies strongly above yesterday’s high and reverses, that would create a wedge top and it would then probably lead to a 2nd leg down. This means that as strongly bullish as yesterday was, there probably will be a swing trade for the bears that starts within the first couple of hours. Swing trades provide good trading for beginners. Also, strong bull channels usually convert to trading ranges, which also means that the trading will probably be more 2-sided today.
What about yesterday’s breakout to the new all-time high? Yes, the momentum up was strong, but that was to get to the new high. It was not strong once it was there. There was strong selling at the end of the day. I will write more about this in the weekend blog.
Today is a Friday, so traders who are trading online should watch weekly support and resistance, especially in the final hour. These are often magnets at the end of the week.
The Forex markets were mostly quiet overnight, although the AUDUSD had a little strength. The best Forex trading strategy today will be to expect Forex scalping. Scalping is more difficult for traders learning to trade Forex markets because traders have to make quick decisions and they have to manage their trades very well. Every pip counts when trading Forex for a living and going for small profits relative to the risk needed to take the trade.
Summary of today’s price action and what to expect tomorrow
The S&P Emini futures contract traded up from an expanding triangle on the open, but the rally was weak. However, the bulls achieved their goal of closing above the February high, and this made today’s close the highest ever. The bulls want follow-through, especially since this breakout to a new high has been so weak. Next Thursday is the last day of the month and traders will use next week to make a statement. The bulls want the month to close at a new high. Although not likely, the trading strategy for the bears is to try to reverse the month and close back below the March low.
The best Forex strategy today for traders learning Forex trading was to look to swing trade the Canadian dollar from the short side. The CADJPY had a very strong bear trend day. Other markets had mostly Forex scalps today.
See the weekly update for a discussion of the weekly chart and for what to expect going into next week.