Although the Emini S&P500 futures gapped down today and the high probability trading strategy over the next few days is to look to sell for a test down after the 60 minute wedge top, the Emini opened with big dojis at support (the 60 minute moving average). This is a trading range open and is within nested trading ranges, and it therefore increases the chances of a lot of trading range trading today. Traders looking for a swing trade need to wait for a strong setup or for a breakout with good follow-through. Otherwise, traders will be looking to buy below bars, sell above bars, and scalp, and this is not trading for beginners. Be patient because there will be opportunities.
My thoughts before the open: Candlestick pattern is a triangle on the daily chart
Although daytraders who are trading online do not have to look at the daily chart, higher timeframes have support and resistance that affects day trading. The trading tip of the day is that traders should realize that as strong as the rally has been for 3 weeks, it is still only a test of the top of the trading range. There is no breakout until there is a breakout, and that has not yet happened.
I mentioned in the price action trading room several times yesterday that the rally on the 60 minute chart has 3 pushes up and is therefore a wedge. Also, yesterday’s rally was the 2nd push up after the breakout above the 60 minute double top. Both of these things often complete a rally, which means that they usually are followed by a pullback. Although a technical analysis trader would see a divergence in the stochastics (I did not check), a price action trader already knows that because the 3rd leg up was obviously weaker than the 2nd, and the 2nd was weaker than the first. The trend formed smaller bars and fewer consecutive bull trend bars as it went on, and this creates a divergence on oscillators for traders who use traditional technical analysis.
So what should traders learning how to trade the markets do today? After a wedge bull channel, there is usually a correction that lasts a couple of legs. Also, when the market is at the top of a trading range, it usually reverses down. The Emini will probably gap down today. This will turn yesterday into a one day island top. Island tops and bottoms within trading ranges are common and are not particularly meaningful. Trading ranges always disappoint traders. This means that the bears will probably be disappointed by the follow-through from the gap down. Yes, high probability trading futures trading strategy is to look to sell today. However, since the 60 minute chart might be forming a smaller trading range between the December high around 2082 and the all-time high around 2110, and the bottom is not far below, the downside might be limited.
If there is an early rally, bulls will quickly buy since the market is far enough below yesterday’s close for a scalp or swing trade up. However, since they expect at least 2 legs down, if the rally is not too strong, day traders will look to sell the rally. The daily and 60 minute charts are forming increasing tighter trading ranges. This means that the legs up and down are smaller. Since there are trading range, most of the trading during most of the days is within tight trading ranges. Bulls and bears are disappointed by the follow-through. Although there will probably be at least one swing trade today, the odds of a strong trend day in either direction are small.
I mentioned yesterday that the Forex price action across the markets is showing a little weakness in the dollar. The EURUSD is trying to test up, and the best Forex trading strategy near-term is to look for buying opportunities. Any rally is only a minor trend reversal and probably part of a bear flag, but there is enough room for a swing trade up and for scalping Forex markets. The EURJPY is forming a wedge bottom. Because the bear trend channel is tight, a trading range is more likely than a trend reversal, but the pattern is clear enough so that computers will trade it as if there will be at least a reversal for a week or two.
Summary of today’s price action and what to expect tomorrow
The S&P500 Emini candlestick pattern on the daily chart is a low 3 sell signal at the top of a 3 month trading range. Today was the entry bar, but it closed with a bull body above yesterday’s low. This is a weak sell for the bears.
Technical analysis of the 60 minute chart shows a wedge rally, and high probability trading is to look for a pullback. However, there might be one more push up before the pullback begins. The bears are hoping that today’s rally is a lower high and the start of the second leg down on the 60 minute chart. The bulls are hoping that today’s selloff is just part of a 2 day triangle that will lead to a new all-time high.
With the 60 minute, daily, and weekly charts in tight trading ranges, most of the bars every day have been in tight trading ranges as well. However, the Emini futures contract is at a critical resistance and there could be a strong breakout at any time. If there is a strong bull breakout, I think it will fail and become a climactic top that will be followed by several month down.
For online currency trading, the dollar is overbought. It broke to the downside against the Canadian dollar. There have been very good scalps and swing trades over the past couple of days shorting the USDCAD. Strong trends like the 5 minute USDCAD chart has had offer good Forex trading for beginners. The best Forex strategy is to look to sell pullbacks. The selloff is fairly climactic and the market might bounce for a test back up to 1.2400, but there should be sellers for a 2nd leg down after such a strong bear breakout below a 2 month trading range.
The Euro is also bouncing against several markets. The cleanest pattern is the wedge bottom on the daily EURJPY chart. Since the bear channel is tight, the bounce will probably lead to a trading range instead of a bull trend.
See the weekly update for a discussion of the weekly chart and for what to expect going into next week.