I leave early today and I am posting this before the open. Here are my observations. Today’s big gap up above the weekly channel is a low probability event and therefore it will trap scale-in bears in; bears who have been selling near the top of the channel are now holding a position with a big loss and they will use any early pullback to exit with a smaller loss. It will trap bulls out. They were waiting to buy a deeper pullback, and instead now can only buy high. The result is that if today does not become a strong bear trend day, it will probably be followed by additional buying for at least a couple more days and have at least a couple of small legs up.
Today will open with a big gap up and breakout above the weekly bull trend channel. When there is a big gap up, the Emini usually go mostly sideways for an hour or more until it gets closer to the moving average. At that point, it decides if the breakout will fail or if the pullback is simply an opening reversal down to support. Even if the day becomes a big bull trend, the pullback often looks like an early bear trend and can have consecutive strong bear trend bars. The pullback often is a wedge bull flag or a high 2 buy setup. Here is an example of a gap up and a pullback into a wedge bull flag.
Once the market begins to resume up, bulls will look for signs of strength, like 2 – 4 consecutive bull trend bars (buying pressure). If today becomes a big bull trend day, it will probably do so in the form of a channel after an early pullback. Bulls will swing at least part of their longs, even though the Emini will constantly look like it is forming wedge tops.
If instead of a weak selloff (a wedge bull flag, which means that the selling has legs within it), the Emini immediately sells of with 2 or 3 consecutive big bear trend bars closing on their lows, the chance of a bear trend day becomes greater than the odds of a bull trend day. If that happens, traders will trade it like a bear trend and they will swing shorts and look for additional short setups all day long.
Although the odds are that the breakout will fail within 5 bars, which is 5 weeks, the breakout is big enough for traders to consider the possibility that the bull trend will again enter a breakout phase and become an even stronger bull trend. The republicans took over the Senate. The last time there was a dramatic bull breakout above a bull channel that led to a much stronger bull trend on higher time frame charts was after the 1994 election when the republicans took over the House.
Will that happen this time? Probably not, but the market has memory, and it is making traders consider that possibility. If the more likely outcome happens, and that is that the breakout will fail within 5 bars, the bulls will be quick to get out and will wait for at least 10 bars and two legs down before looking to try again. Since this is a weekly chart, a failed breakout could lead to a pullback that lasts several months.
Day trading outlook for tomorrow’s Emini price action
Premarket price action analysis
See yesterday’s intraday market update report for today’s premarket analysis. Once there, scroll down to the heading, Day trading outlook for tomorrow’s Emini price action.
See the weekly update for a discussion of the weekly chart and for what to expect going into next week.