The Emini futures contract sold off on the open and tested last week’s low. This makes the week almost an outside down week, and last week’s breakout above the 3 month trading range on the weekly chart has failed.
Although the bears have a reasonably strong breakout on the open and the Emini is always in short, the selling is not especially strong, and it is a breakout attempt below the bottom of a 2 week trading range. There is also a nested parabolic wedge. A trading range over the next hour or two is more likely than a strong bear trend.
The bulls need either a 2nd entry buy or a strong reversal up. Without that, bears will look to sell rallies and try for a channel down, but the odds of a big bear breakout below a 2 week trading range are not high. If they break strongly below the range, today could become a strong bear trend day. Without that, this will probably fail and the Emini will then enter a trading range. It will then form buy and sell patterns, and choose between trend resumption down and trend reversal up.
My thoughts before the open: Price action trading strategy in breakout mode
Yesterday’s FOMC report failed to lead to a breakout or a reversal, even though the S&P Emini futures contract is at the all-time high. This is a very important price level, yet the Emini is not moving. It needs more information.
Today is the last day of the month, and the Emini might be waiting for early May to decide whether to have another leg up or a reversal down. The nearest support and resistance on the monthly chart are the February and March highs, and the March close. These are magnets going into the final hour.
The 60 minute chart is in a week-long triangle at the top of a 3 month trading range withing a 6 month trading range. The trading range is getting tight and it has lasted a long time. In general, the longer a trading range lasts, the bigger the move is once it breaks out. There is a 50% chance that the 1st breakout attempt will reverse. Once there is a strong breakout with follow-through, the trend will probably last for several months. Because the monthly chart is so overbought, even though the Emini is in a small pullback bull trend on the monthly chart, the odds favor a swing down to the monthly moving average.
Yesterday’s lack of a breakout after the FOMC report increases the chances of more trading range price action today in the Emini. If there is a reliable buy setup at the bottom or a sell setup near the top, or a strong breakout with follow-through, traders will swing trade. Without that, online daytraders will not trust moves and will be more inclined to scalp. The day trading tip for beginners today is to expect trading range price action, but be ready in the final hour for a possible swing trade because the market might get drawn to monthly support or resistance.
The Forex markets have had dollar weakness for a couple of weeks, and it is getting extreme. The last 2 legs up on the 60 minute EURUSD have been the strongest two legs in over 100 bars. This is more likely a buy climax that will lead to exhaustion and a correction down than it is a measuring gap that will lead to a measured move up.
Although the USDJPY is strong, it needs to break above the week long trading range. If it does, it could rally for several more days, and traders learning how to trade Forex markets should be looking for buy setups.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The S&P Emini sold off on the open, but held above last week’s low for 5 hours. Once it broke below the double bottom, it quickly fell for a measured move down.
Today is the last day of the month and the Emini did not test monthly support or resistance. However, the month ended as a small bull doji bar, which is not a strong bull bar. This is not a reliable candlestick signal bar for the bears, but the Emini is so overbought on the monthly chart that the selloff might come from a bad signal bar.
Because of today’s sell climax, the odds favor a trading range in the Emini. That probably began with the rally of the final hour. It is testing the bottom of the 60 minute trading range of the past month. The bulls want a reversal up and the bears want a downside breakout. Even though the monthly chart will likely selloff at some point in the next few months, until there is a breakout, there is no breakout and the monthly trend still is up.
As expected, there was good follow-through buying in the USDJPY until late in the day. The Euro is short-term overbought against the dollar and yen, and traders learning to trade Forex markets should begin to look for two-sided trading. Traders will begin to sell rallies, in addition to buying pullbacks, in the EURUSD and EURJPY.
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.