The Emini gapped up, but sold off on the open. Three of the 1st 4 bars were dojis. This is trading range price action, and it increased the chances for more trading range price action for the rest of the day.
This is a trading range open. Online day traders want to see a strong breakout up or down before they will swing trade. Alternatively, if there is a trading range, they will look for a double top or bottom with a good sell or buy signal bar. If they get it, they will enter the reversal using a stop order. If this leg down continues, it will probably be a bear leg in a trading range because the follow-through has been weak and because yesterday was a strong bull trend day, and a bull trend usually becomes a trading range before it can become a bear trend.
Remember, there was a 75% chance of at least a 2 hour sideways to down move beginning within the 1st 2 hours. It looks like it might have begun. There is still a chance of early follow-through buying for an hour or two, but the odds favor a trading range now, or after any early buying.
Pre-Open Market Analysis
S&P 500 Emini: Learn how to trade a climactic breakout
Yesterday strongly broke above the top of the 2 month trading range on the daily chart. Traders usually like to see a follow-through bar before they believe that the breakout will succeed and lead to a swing up. That makes today important. The bulls want a big bull trend bar closing on its high.
If today closes on its low and back below the top of the trading range at 1943.75, traders will conclude that the breakout failed, and they will look to sell below today’s low on Monday. While this is unlikely, given how strong the momentum up has been for 2 weeks and ho strong the bull breakout was, online day traders always have to be ready for the exact opposite of what is likely.
Since it is a trading range breakout and most breakouts fail or at least have bad follow-through, there will probably be something disappointing about today’s candlestick when it closes. Also, Monday is the last trading day of the month, and the price action today and Monday affect the appearance of the monthly chart. The monthly chart is in a trading range, and last month was a big doji bar. This reduces the chances that this month will be a strong bull reversal bar closing on its high.
Since it is at its high, and is up 12 points with an hour to go before the day session opens, if February is not going to be a strong bull trend bar, then it would have to pull back between now and Monday’s close. With last month having a big tail on the bottom and a big bear body, and this month mostly overlapping last month and the context is the same, this month might also end up not being especially bullish. Monday might close back down around the open of the month, which was 1919.25. This would create a doji candlestick pattern on the monthly chart.
This would be consistent with the monthly chart being in a trading range and therefore neutral instead of bullish. A strong bull close will make traders wonder if the trading range is about to end and have a bull breakout. February will be a buy signal bar and the monthly chart is in a bull trend. The odds are that March will trade above February’s high, whether or not there is a pullback into Monday’s close, which would put a tail on top of the bar and make it a less reliable buy signal bar.
Wednesday’s rally was a breakout on the 60 minute Globex chart, which is a spike. The rally since Thursday’s pullback has been in a channel, which has been strong, but this still created a spike and channel bull trend candlestick pattern. There is a 75% chance of a bear breakout below the channel and then the evolution into a trading range. There is less than a 25% chance of a bull breakout above the bull channel and an accelerated trend up.
If the reversal down begins today or tomorrow, there would also be an expanding triangle top on the daily chart with the February 18 and 22 highs. It has a better shape on the day session daily chart. The Emini is approaching the 1980 bottom of the 3 month trading range from the end of last year, which is resistance and therefore a magnet. These are additional factors that increase the chance of a pullback by the end of next week.
The 5 minute chart of the Emini again yesterday ended with a buy climax. This means that there is a 50% chance of follow-through buying for the 1st hour or two. There is only a 25% chance that today will be a strong bull trend day that lasts all day. There is a 75% chance that there will be a 2 hour sideways to down move that begins by the end of the 2nd hour.
Forex: Best trading strategies
The EURUSD has been in a 4 day tight trading range just above the December/January trading range, which is support on the daily chart. This is after a strong reversal down from a 2 legged rally within a yearlong trading range. The daily chart is in a trading range, and this 2 week selloff is a test of support (the top of a trading range).
As strong as the selling has been for 2 weeks, the odds are that this selloff will be just another leg down in a trading range. Trading ranges have many strong legs up and down. Until there is a breakout, there is no breakout, and the odds are that this selloff will fail to break below the bottom of the yearlong trading range. This means that it will be followed by a leg up within the trading range.
There is no bottom yet and the momentum down is strong. This increases the chances that it will fall more before it evolves into another trading range. The EURUSD is deciding whether the support at the top of the 2 month trading range will hold, or if the EURUSD will instead have to test down to the bottom of the range. If so, it might get stuck in that 2 month trading range and create another trading range at the same level, between around 1.0700 and 1.1050.
The EURUSD has been in a bear breakout for the past 2 hours and it is testing Wednesday’s low. The bulls want a double bottom. The selloff was strong enough so that the 1st reversal up will probably be sold. This means that the best that the bulls will probably get over the next 2 hours is a trading range.
The bears want the bear breakout to continue, but the selloff on the 5 minute chart was climactic and it had 2 legs down. This current 2nd leg is weaker and this is a spike and channel bear trend. The odds are that it will evolve into a trading range within the next hour.
I am writing 15 minutes before the NYSE opens. The bears want a strong break below Wednesday’s low. If they get it, the EURUSD will be back in the December/January trading range, and it will then probably test the bottom over the next couple of weeks.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini sold off after a gap up, and it bottomed at the neck line of the double bottom on the daily chart. The bulls got a 2nd close above the breakout point, which is good, but it came with a bear body, which is bad for the bulls. This is trading range behavior. Both the bulls and bears are constantly disappointed.
Monday is the last trading day of the month. The month will probably close in its upper half and create a buy signal bar on the monthly chart. March will probably have to trigger the buy by trading above the February high, but the odds are that the bull breakout will fail. The probability still favors a test below the 2 year low before a test above the all-time high at the top of the 2 year trading range.
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.