Posted 7:15 a.m.
The day opened with a 8 bar bear micro channel. However, the follow-though has not been strong. The entire leg down from yesterday’s high has had many bull bars, and it is therefore more likely a bull leg in what will become a trading range than a bear trend. A trading range trades down for 1 – 3 hours and then up for 1 – 3 hours. There is no bottom yet, but this selloff will probably end within the hour and be followed by a swing up. A trading range day is more likely than a trend day up or down.
Pre-Open Market Analysis
S&P 500 Emini: Learn how to trade consecutive doji candlestick patterns on the weekly chart
Despite a strong rally on Friday, last week was a doji bar on the weekly chart and it was an outside bar with the prior bar also being a doji bar. These consecutive doji candlestick patterns are a sign that the Emini is in balance. The strong legs up and down have lacked follow-through. This is trading range price action. Until there is a breakout, there is no breakout, and the chance of a bull breakout to a new all-time high is still only about 50% or only a little higher.
The bears have repeatedly been able to stop the bulls below the July high. At some point, one side wins. There will either be a new all-time high or a test of the October low. However, even if there is new all-time high, it will probably fail within 100 points because the monthly chart is so overbought. The trading range of the past year will probably then be the final bull flag. If the Emini instead reverses down and breaks below the October low, the trading range of the past year will be a double top on the monthly chart.
The FOMC meeting next week is a catalyst. There have been many other catalysts this year, yet the Emini is still within a trading range. With everyone believing the Fed will raise interest rates and attach a statement to the effect that they will wait a long time before raising them again, this will not be news. It is already priced into the market. Anything other than that will be news. It does not matter what they do. The bulls already know how much money they will invest. The bears already know how much money they will invest. No one yet knows who has more money. We might find out before or just after the FOMC meeting next week.
If there is a strong bull breakout above the all-time high, even if it will probably fail within 5 bars on the monthly chart (5 months or so), traders should buy and not be in denial. Likewise, despite the strong rally last week and in October, if there is a strong reversal down, the bulls should not continue to hold onto longs. They should sell out of their positions. Traders who trade the markets for a living do not fight the market. Those learning how to trade the markets need to learn that price is truth, and they should not hold onto beliefs that are inconsistent with what the market is now doing.
The Fed has not raised interest rates since 2006. This is the longest stretch in history and therefore it is unsustainable and climactic. The monthly chart has been in a bull trend for 7 years, which is also unusual and therefore climactic. Whenever there is a climax and it reverses, as a guide, I look for about 10 bars and two legs in the opposite direction. A climax can last much longer than what seems possible. This one could go on for much longer. However, it is around historical maximums and therefore will likely have its year or two pullback soon.
The Emini has repeatedly tested the August 17 bear trend high, but it has continues to be resistance. If the Emini pulls back today, the month-long trading range will have 3 reversals down and therefore become a triangle. This is not helpful additional information because traders already see the past month as a trading range. It is a balanced market in breakout mode. The minimum target after a breakout is a measured move base on the height of the trading range. The range is about 100 points tall. That is why I think that a bull breakout will fail within about 100 points and not reach the 300 point target based on the yearlong trading range.
The Globex chart is down 4 points from Friday’s close and 10 points from its overnight high. Friday was a huge bull trend day, but it had 3 pushes up. A strong bull trend day that does not have any significant pullbacks is a buy climax. There is a 50% chance of follow-through buying for the 1st hour or two. There is a 75% chance of at least 2 hours of sideways to down trading that starts within the 1st 2 hours. There is only about a 25% chance of a strong bull trend day where the pullbacks are all less than 2 hours. Friday’s rally had 3 pushes and it ended just above the August bear trend high. This increases the chances that today will have an early high of the day around or below Friday’s high.
With last week being an outside week and the last 2 weeks being dojis on the weekly chart, this week might be an inside week and possibly another doji bar on the weekly chart. That would be an ioi candlestick pattern made of 3 dojis on the weekly chart. That is intensely neutral and in breakout mode going into next week’s FOMC meeting. Will this happen? It is not important to traders this week. If it does happen, it will just highlight how intensely wound the market is on the weekly chart. It will make traders more eager to enter on a strong breakout up or down, expecting a bigger breakout and more follow-through. But, until there is a strong breakout, they will continue to buy low, sell high, and take quick profits.
Forex: Best trading strategies
The EURUSD had a 400 pip rally on Friday that was a bull breakout above its month-long wedge bottom. The bears see the rally as simply a pullback to the breakout point, which is the bottom of the trading range that began in May. The bulls see it as a double bottom with the April low and therefore a reversal up from a double bottom higher low major trend reversal.
Whenever there is a huge bull breakout bar on the daily chart, it is climactic. A bear trend is usually followed by a trading range, not a bull trend. That means that Friday’s rally was probably a bull leg in what will become a trading range. Since the sell climax lasted over a month on the daily chart, the reversal sideways to up will probably last about TBTL Ten Bars, Two Legs on the daily chart.
Because a trading range is likely, both bulls and bears will probably be disappointed by follow-through after strong moves. Friday was a strong move up. It will probably be followed by at least one more leg up over the next couple of weeks. However, since a trading range over the next month is more likely than a bull trend, the bulls will probably be disappointed by the lack of follow-through buying this week and by how deep the pullback will be.
Trading ranges usually have pullbacks below the middle of the range. That means that many bulls will wait for about a 50% pullback from last week’s rally before buying again and creating is a 2nd leg up. The pullback might also last a week or two and have several smaller legs up and down within it. With the Fed possibly raising interest rates next week for the 1st time since 2006, the EURUSD might simply go sideways and wait to hear the Fed’s statement next week before beginning a 2nd leg up.
Although there is a 60% chance of at least a 2nd leg up and a measured move up, there is a 40% chance that Friday’s reversal attempt will fail. If the EURUSD works back below Friday’s low, traders should look for a measured move down (400 pips) instead of a measured move up. The 60 minute chart has been trending down in a broad bear channel for about 40 bars. This is a bear trend on the 60 minute chart, even though it is a bull flag on the 240 minute chart. The bears who are swing trading on the 60 minute chart are hoping for a break below Friday’s low, but they know that a bull breakout of the bear channel is more likely. They will be quick to buy back their shorts if there is a bull breakout. Swing traders on the daily chart are still long with a stop below Friday’s low.
The swing down on the 5 minute chart has also been in a broad bear channel. Traders are mostly scalping up and down on the 5 minute chart. However, they will swing trade any strong breakout, especially a bull breakout, looking for at least a test of Friday’s high.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini had a tight bear channel on the open, but repeatedly found support at the 50% pullback from Friday’s rally. It spent most of the day in a trading range where limit order traders scalped, and then reversed up at the end of the day.
The daily chart has been in a trading range for a month with several strong legs that failed to become breakouts. Today reversed down after Friday’s strong rally, but found support 4 times at the 50% retracement level from Friday’s rally. Because today was in a trading range after a strong initial selloff, bears will look for a 2nd leg down tomorrow and the bulls will want a continued trend reversal up. The odds favor more trading range price action, possibly until next week’s Fed announcement after the FOMC meeting.
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.
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When I mention time, it is USA Pacific Standard Time (the Emini day session opens at 6:30 am PST, and closes at 1:15 pm PST). You can read background information on the intraday market reports on the Intraday Market Update page.
