Posted 7:15 a.m.
The Emini gapped up and formed a 2 day island bottom. The initial rally closed the gap down on the daily chart. However, there were no consecutive big bull bars and many bars had tails on top. This is trading range price action.
Although the Emini is Always In Long, this rally is weak, and that increases the chances that it will evolve into a trading range soon. The channel up is tight enough so that the bears will need at least 10 bars of sideways to down trading to create enough selling pressure to make a credible top. Alternatively, they can get a strong breakout to the downside at any time. Without that, the odds favor more sideways to up trading. However, unless the bulls start to form consecutive strong bull bars with closes on their highs, traders will begin to sell above bars and the rally will eventually turn into a trading range.
At the moment, this looks like a bull leg in what will become a trading range, but the bulls are still in control, and that means that today might trend up all day. Until there is a top or a bear breakout, the Emini is still in a bull trend today.
Pre-Open Market Analysis
S&P 500 Emini: Candlestick pattern is an island bottom
The Emini began a breakout into the close yesterday and it is up 13 points in the Globex market. The odds are that it will gap up today, which will create the 3rd island reversal on the daily chart in 2 weeks. Nothing has changed. The daily chart is in a bear trend, but the selloff was so strong that it will also be in a trading range for weeks to months, and the monthly chart is forming a bull flag at the moving average. The target for the bulls is 2020 – 2050, which is the bottom of the 7 month trading range, and the odds are that the Emini will get there within a month or two, and then begin a 2nd leg down from there.
When there is a gap up, day traders know that the odds of a trend day are higher, and that the trend can be up or down. When the gap is big, the chance of the trend continuing in the direction of the gap is slightly greater than the chance of the gap up leading to a reversal down. If there is a big gap, the Emini will be far above its average price. There can still be follow-through buying for an hour or so, but the Emini usually has to get closer to the moving average before it decides on the direction of the trend. Because the daily chart is in a trading range, online day traders will be suspicious of all moves and they will be quicker to scalp trade because they know that reversals can come unexpectedly at even minor support and resistance.
If the day becomes a trading range day, day traders will look to buy reversals in the bottom third and to buy strong bear closes near the low to to buy below prior lows. They will sell strong bull closes at the top and above prior highs. If a reversal comes after a strong move, day traders will wait for a 2nd entry or a strong reversal (breakout bar) before taking entering in the reversal.
Last week’s candlestick pattern on the weekly chart is a bull reversal, and it is still possible for the buy to trigger today or tomorrow. The high of the bar is 1991, which is only about 34 points above the current price. If there is a rally today and then a rally on tomorrow’s unemployment report, the Emini could easily break above last week’s high. However, the odds are that the rally will stall at the bottom of the 7 month trading range.
So why would anyone buy if the odds are that this is a bear rally? It is because there is still enough room for a profitable trade up to resistance. In fact, the Emini might get vacuumed up there in a strong bull breakout once there is a consensus that the Emini will successfully reach the target. If there is a strong buy climax to the resistance area, it will more likely be an exhaustion gap (the gap is the space between the close of the bar on the daily chart and the high of the prior day) than a measuring gap, which would lead to a measured move up to above the all-time high.
Forex: Best trading strategies
All of the major Forex markets have been in tight trading ranges for a few days, giving limited opportunities for traders who are learning how to trade the markets. Those trading Forex markets for a living are taking Forex scalps and entering with limit orders. They are buying strong bear closes near the bottom of the range and buying new lows, and adding on 10 pips lower, then scalping for 10 pips. If they scale in, many get out breakeven on their 1st entry and with a 10 pips profit on their 2nd entry.
When the price action is this tight, most traders should simply wait for a strong breakout with follow-through. The Forex markets might be waiting for tomorrow’s unemployment report. However, when there is a potential market moving event, the market often breaks out before the event, so day traders should be prepared for the breakout today or tonight, and not be in denial if it begins unexpectedly. The biggest and most profitable breakouts often come when there appears to be no reason for them to occur, and day traders who remain open to any event are in a position to enter early and to manage their trades correctly (swing trade their Forex positions).
Just as I completed this sentence, the EURUSD is having a strong enough bear breakout for day traders to look for follow-through selling after a pullback.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini rallied on the open and sold off from a parabolic wedge down to a new low and the 60 minute moving average. It found buyers for the nested wedge into the close.
The Emini had its 4th consecutive doji day going into tomorrow’s unemployment report. It is also in the middle of a 2 week trading range. Traders are neutral going into the report and will trade whatever momentum they see after the report, with no biases going into the day. Although the report can create a trend up or down, the past 4 trading range days increase the chances of trading range price action tomorrow, even if there is a big move on the open.
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.
Traders can see the end of the day bar-by-bar price action report by signing up for free at BrooksPriceAction.com. I talk about the detailed S&P Emini futures price action real-time throughout the day in the BrooksPriceAction.com trading room, and a 2 day free trial is available.
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.
Hi Al,
I think the weekly signal bar for USD/JPY is invalid. There is a good chance USD/JPY will test the bottom of the range at 118.50 by next week.
I am mentioning this because of several market commentator thinks USD/JPY will move back up because of the weekly signal bar.
The daily chart of the USDJPY had a big bear breakout, but it was followed by a big reversal to around 50%. If you are saying that the low is wrong on the weekly chart, every broker has his own data, and it might be wrong for any broker. For TradeStation, the 5 minute chart corresponds to the weekly chart, and the 5 minute chart’s price action looks normal. This makes me the data is correct.
However, the big down, big up price action is a sign of confusion, and it is usually followed by a trading range, which is beginning to unfold. The market has to probe up and down to discover what the appropriate range is. It’s back into the Dec – May tight trading range, and the bottom of that range is around 118 to 118.50. I agree that it will probably be tested, but I don’t know if the test will be next week, or if it will first test last week’s high just below 122. We’ll see.