The Emini had a strong bear breakout on the open and is always in short. However, this is climactic selling and the market is far below the moving average. The stop is far away so the risk has increased. The computers have to reduce their risk and this means that they have to begin to buy back their shorts. This will create a pullback. The bulls hope that this is an exhaustive sell climax and that there will be an early low of the day. In the absence of buying pressure, the best the bulls can hope for over the next hour or two is a trading range. A strong reversal is unlikely. The bears want to sell again, but might wait 10 bars or so until the Emini gets closer to the moving average.
After a sell climax, the market will probably be in a trading range for an hour or two. It will then decide between trend reversal up and trend resumption down. Although the rally can last for 10 or more bars, bulls should wait for a 2nd entry buy or for a series of consecutive strong bull bars before buying. Bears will probably wait for at least a couple of legs up before looking to sell again.
My thoughts before the open: Bear trend channel within a trading range
The Emini is in a 3 day bear trend channel within a trading range. Day traders see bear channels as bull flags and expect an eventual bull breakout and then more trading range price action. Traders learning how to trade the markets should also look at 60 minute charts to see where higher time frame support is. The Emini is close to the bottom of a 2 month trading range and the odds favor a bounce. Even though the monthly chart is in a buy climax and will probably correct 20% this year, most reversal attempts fail, and the current one probably will as well. However, at some point, one will succeed, and when it does, the breakout will probably be big and fast.
Since Friday’s unemployment report comes on a trading holiday, the Emini will probably try to get neutral today and tomorrow, which means that big swing trades are less likely and a lot of trading range price action is more likely. Although the Emini might break out below the bottom of the 2 month trading range below 2030 before the report, it is more likely that it will not.
Summary of today’s price action and what to expect tomorrow
After a brief, strong selloff on the open, the Emini rallied for an hour and then entered a trading range for the rest of the day. Day traders scalped all day, and many traders were using limit orders.
Friday’s unemployment report comes when the market is closed for the holiday. Tomorrow will probably also be mostly sideways going into the report. There is always the chance of a surprise trend up or down, but a trading range day is much more likely.
See the weekly update for a discussion of the weekly chart and for what to expect going into next week.