Trump rally stock market correction to Dow 20,000
While today broke below yesterday’s low, the 1st bar closed back above that low. In addition, it was a bear doji, just like the final bars of yesterday. This tight trading range price action reduces the chances of a strong trend day up or down. Yesterday was in a bear channel for 5 hours. Since a channel usually converts into a trading range, the odds are that today will have a lot of trading range price action. The targets for the bulls are the lower highs in the wedge channel.
While the bears want a strong bear trend day, they know that the odds are less than 40% because of yesterday’s wedge channel and the lack of a gap down today. Yet, they still have a 50% chance of follow-through selling in the 1st hour or two. Late in the day, they will probably again try to create a selloff. If this is the early stage of a bear trend, there is an increased incidence of selloffs in the last hour.
At the moment, the Emini is deciding whether to reverse up from a wedge bottom or get follow-through selling from yesterday. In either case, the odds still favor a lot of trading range trading today after yesterday’s bear channel. The bulls need one or more strong bull trend bars to convince traders that the rally to the targets above has begun.
Pre-Open market analysis
The Emini sold off in a series of sell climaxes yesterday. Therefore, there is a 75% chance of at least 2 hours of sideways to up trading today, starting by the end of the 2nd hour. Furthermore, there is a 50% chance of follow-through selling in the 1st 2 hours.
Yesterday was a huge bear trend day. In addition, the Emini was extremely far above the weekly moving average at its high. The odds are that it will fall to the weekly moving average. Furthermore, since that is just above the close of last year, the Emini should fall below that close.
Since the monthly chart is in a strong bull trend, a selloff of 1 – 3 months would become a bull flag. Yet, a 150 point selloff would be a bear trend on the daily chart.
The importance of follow-through selling today
If the bears get another big bear trend day today, then there would be a 60% chance of a measured move down. This would therefore probably be the start of the test of the December close. Yet, a big bull trend day would create a failed breakout below the 3 week range.
Because the selling was so extreme today, even if the Emini rallies strongly today, the odds still favor at least a 2nd leg down. In addition, there is better than a 50% chance that the correction down to the December close and Dow 20,000 has begun.
Overnight Emini Globex trading
The Emini is down 2 points in the Globex session. Because yesterday had a series of sell climaxes, today will probably have at least a 2 hour trading range. At the moment, a big gap down is unlikely.
Furthermore, the Emini is breaking below a 3 week tight trading range. Therefore, trading range price action will still be influencing the market. Hence, there is a 50% chance that today will disappoint the bears by closing above its open. While a big bull trend day is possible, today will more likely be mostly a trading range day. If it closes above its open, it will likely do so in a trading range day or a weak bull trend day.
Today is a very important day. There is at least a 50% chance that the selloff to the December close has begun. If today is a huge bear trend day, then the bears will probably reach the target within a couple of weeks. More likely, yesterday will be a spike in a Spike and Channel bear trend, which might take a month or two to complete. Therefore, big pullbacks along the way are likely.
In addition, the bulls will probably buy around the close of last year. Hence, this selloff will probably be just a pullback on the monthly chart. There will therefore probably be at least one more rally to test the all-time high after the pullback ends.
EURUSD Forex market trading strategies
The EURUSD Forex market is testing the neck line of the head and shoulders bottom on the daily chart. Yet, the rally on the 240 minute chart is a nested wedge. There is therefore a 75% chance of a bear break below the bull channel. Furthermore, that break will likely lead to 2 or more legs of sideways to down trading. In addition, the selloff will probably reach one or more higher lows in the bull channel.
Since there is still a 25% chance of a strong breakout above the bull channel, traders have to be prepared to buy the bull breakout. In addition, there is a 40% chance of a breakout above the neck line of the head and shoulders bottom on the daily chart. Yet, because of the wedge on the 240 minute chart, that breakout will probably have to wait until after a pullback on the 240 minute chart.
Overnight EURUSD Forex trading
The EURUSD Forex market has been in a 40 pip range for about 24 hours. The odds are against much higher prices from here. Therefore, if there is a bull breakout above this bull flag, it probably will fail. Hence, this trading range will probably be the final bull flag on the 240 minute chart before a swing down over the next several days.
Because there is no clear top yet, there might be one more new high before the pullback begins. Since the 3 week rally is at important resistance, there is still a chance of a strong bull breakout. But, that is less likely than a reversal down for several days.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini formed a trading range day after yesterday’s big bear breakout. This was therefore bad follow-through selling. Hence, it makes the bear breakout slightly less bearish. Yet, the context is good for the start of a 5% correction down to the December 2016 close. In addition, yesterday was a strong breakout. It therefore will likely have follow-through selling over the next few weeks. The odds favor giving back all of the 2017 gains. Yet, there probably will be buyers around the December close.
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.