The Emini began with big bars and big reversals. This is a dangerous environment for most traders because the big bars increase the risk and the big reversals lower the probability of a swing trade. The 6th bar triggered an expanding triangle buy from a reversal up from yesterday’s low, and the expanding triangle was nested within a 3 day larger expanding triangle. However, the bear broke strongly below the bottom. The Emini is Always In Short.
Although the selling has been strong, it will probably be limited to the 1st 1 – 2 hours, and then be followed by a swing up lasting at least a couple of hours. Yesterday was a sell climax, and today’s selling is also extreme. This reduces the chances of a relentless bear trend and it increases the chances that the bears will begin to take profits and wait an hour or two before looking to sell again.
Just because the probability favors a swing up does not mean it will happen. Traders need to be open to the possibility that today will trend down all day.
Pre-Open Market Analysis
S&P 500 Emini: Learn how to trade a bear breakout on the 60 minute chart
The Emini had an extreme sell climax yesterday, giving online day traders a chance to learn how to trade a bear breakout on the 60 minute chart. There was a 75% chance of at least 2 hours of sideways to up trading. It began just before noon, and the day followed with a good looking lower low major trend reversal. There were 16 sideways bars, not 24. That usually is not enough, so there might be more on the open today.
After a sell climax at the end of the day, there is a 50% chance of follow-through selling for the 1st hour or two before the sideways to up trading begins. While it is possible that the pullback has already begun, it is equally possible that there will be another leg down for the 1st two hours before the Emini once again trades sideways to up.
Yesterday’s 19 bar bear micro channel was an extremely unusual event. A micro channel lasting that long comes only once every year or two. Traders who trade the markets for a living know that it is a sell climax. Traders learning how to trade the markets also need to know that it is a sign of extremely aggressive bears. It could be the start of a swing down that can last at least several days. Remember, over a month ago I said that the daily chart might go sideways for over a month and have both a double top and a double bottom. If the Emini turns down from here, it would be forming a double top with the November high. I also have repeatedly said that as strong as the rally from the October low was, there was still only a 50% chance of a successful breakout above the all-time high.
Even though the Emini is down only 5 points in the Globex session, it is down 20 points from the Globex high. This increases the chances that today will have follow-through buying in the 1st hour or two today. The daily chart of the day session is just above its 20 day EMA, so there is some support at yesterday’s low. Because the daily chart is at the top of month-long trading range and it has been unable to break above the top of the range after 9 days of trying, the Emini might need to swing down to at least the middle or bottom of the range. This means that yesterday’s big bear bar on the 60 minute chart might end up being a spike in what can become a spike and channel bear trend. The Emini is still above the bottom of the 9 day trading range, but that 60 minute bear bar and the bear body on the following bar were enough to make the 60 minute chart Always In Short (an early bear swing in a month-long trading range).
Forex: Best trading strategies
The EURUSD has been in an extreme wedge bear channel for a couple of weeks. I have been writing that it had a 75% chance of having a bull breakout and at least a 200 pip rally. I also said that bulls were consistently making money by buying every new low, and that was a sign that the rally would happen soon. It had a 300 pip rally over the past 2 hours.
Although it has pulled back almost 100 pips, and it could easily pull back more than 50%, the bull breakout was so strong that there is at least a 60% chance that there will be a 2nd leg up and that the breakout will result in some kind of measured move up over the next several weeks. The measured move up can be a 2nd leg that is about as big as this 300 pips 1st leg up.
It could also me a measured move based on the height of this 1st leg up. For example, the bull body on the 240 minute chart is about 200 pips tall. The EURUSD might rally another 200 pips from the close of the 240 minute bull body. If so, it would reach the top of the 240 minute bear channel, which is the target I have mentioned many times as a reasonable upper end goal for the bulls. That is above 1.1000.
Because the bull breakout was so strong, the probability of follow-through is at least 60%. Whenever there is a high probability, it comes with a bad risk/reward. When the probability is due to a big bull trend bar, the stop is below the bar, which means that the risk is big. That is the source of the bad risk/reward in this case. The best stop for the bulls is below the bottom of the bull breakout. If bulls use that stop, they have to trade small enough so that their actual dollars at risk are acceptable. Some bulls instead will wait to buy a pullback over the next week. They will look for 2 or 3 legs down to maybe a wedge bull flag. Their stop would be smaller (either to the bottom of today’s rally or to below the bull flag). By waiting, they risk missing a rally that might continue 100 pips or more before pulling back.
The rally was too strong for most traders to look to sell yet. Also, any selling over the next week will probably only be scalping because the probability is so high that the 1st selloff will be bought.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
Today was another day with consecutive sell climaxes. There is a 50% chance of follow-through buying for the 1st hour or two tomorrow. There is a 75% chance of at least 2 legs and 2 hours of sideways to up trading, which might have begun at the end of today.
I have said several times over the past month that I thought that a double top with the November high was likely. These 2 days are the reversal down from that double top. I also said that the Emini might then form a double bottom with the November low. The bears want the break below the November low, which is the neckline of the double top. The bulls want a reversal up and a double bottom. The probability of each is about 50%.
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.