The Emini opened above the bull channel of the past 2 days, which is a type of buy climax. There is a 75% chance that a bull breakout above a bull channel will fail within about 5 bars and then go sideways to down to the bottom of the channel.
The Emini began in breakout mode. There was a reversal down and then a reversal up, and the range was less than half of an average day’s range. When this is the case, most swing traders wait for a strong breakout with follow-through in either direction. Until then, it is a limit order market.
The bears are getting a breakout, but they need follow-through because a failed breakout below a double bottom is a type of wedge bull flag and bulls will buy a reversal up. Also, the Emini is testing the moving average and is getting close to the bottom of the channel. If the bears get strong follow-through, the Emini will become Always In Short and will get pulled back down into yesterday’s tight trading range, which is not far below. They instead hope for a strong trend down, but with the bars as small as they have been today and at the end of yesterday, and with most of the bars overlapping, the odds are that there will not be a strong trend in either direction before the FOMC report.
The bulls are looking for the bear breakout to fail and for the Emini to form a wedge bull flag at the moving average around yesterday’s high and close. Unless the Emini gets above today’s small lower highs, the weak bear channel can continue down to yesterday’s Final Bull Flag, or even lower.
At the moment, the Emini is Always In Long, but the reversal attempt up from the wedge bull flag is weak. If the bears break below it, they can get a breakout and a measured move down from the failed wedge bull flag.
My thoughts before the open: Day trading tip for an FOMC report
The dominant price action event of the day is the 11 a.m. FOMC report. Day traders learning how to trade the markets should not enter on or just before the report. There is a 50% chance that the initial breakout will reverse within a couple of bars. The day trading tip is that daytraders should instead wait until after there is a big trend bar and a follow-through bar. At that point, the probability of a swing trade is usually more than 50%, and the swing trade sometimes will go a long way.
Since the Emini is in breakout mode, there is a chance of a very big move. However, because it is in breakout mode, there is a greater chance that there will be no breakout of the 4 month trading range. Most breakouts fail, and that is just as true today as it was yesterday. If there is a breakout, be prepared for a swing trade because the 4 month trading range can be followed by a move up or down that can last for a month or more, and the initial leg can be large.
The Emini has been up a little in the overnight session, but the price action has been relatively quiet. Although there is usually at least one swing trade before the report, the Emini can enter a tight trading range at any time this morning and stay that way until the report. Unless there is a strong breakout with follow-through this morning, online daytraders will be inclined to take quick profits, even on swing trades.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The reversal up was strong enough to give the bulls a chance to go above last week’s high tomorrow or Friday, creating an outside up week. However, the weekly chart remains in a tight trading range, and all this would do is decrease the chances for a selloff near-term. The follow-through buying after today’s rally was disappointing and this increases the chances of more trading range trading tomorrow. Until there is a breakout of the 4 month trading range, bulls will continue to buy near the bottom, but exit on rallies, and bears will continue to sell rallies, but take profits near the bottom. Both have reasonable arguments, as is always the case within trading ranges. Until there is a breakout, there is no breakout, and all of these moves up and down are likely to fail.
However, the Emini still has an 80% chance that one of these bear reversals will be the start of a 10% correction this year. The probability does not go up until there is a strong bear breakout with follow-through, and it has not happened yet. If the bulls win, their breakout above the trading range will probably fail and lead to that 10% correction.
Best Forex trading strategies
In the overnight Forex markets, traders learning how to trade the markets can see that the Yen was the weakest market and the British Pound has been the strongest. Day traders will assume that this will continue today until they see evidence that this has changed. The dominant event today is the FOMC report at 11 a.m., and all Forex markets will probably be in small trading ranges until then. This means that Forex online day traders will be mostly looking for scalps.
Traders who are trading Forex for a living will be prepared for a big move up or down, or both up and down, after the FOMC report. The Forex price action is usually easier to trade after the 2nd 5 minute bars has closed. This allows for a possible big move and reversal on the report. If there is a big breakout or a big reversal and a follow-through bar, this can be good Forex trading for beginners. They should trade small and look to enter with a stop, and then hold for a swing trade.
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.