Intraday market update: September 30, 2015
Learn how to trade the markets when oversold

Posted 7:32 a.m.

The Emini gapped up and then formed both a small double top and double bottom. Breakout mode is the most common setup to happen after a big gap up or down. Traders can buy the high 2 or sell the low 2, and the reward is much bigger than the risk, but the probability is low. If they prefer high probability, they have to wait for the breakout and follow-through up or down. At that point, the stop is far and the risk/reward is worse. There are no perfect trades. A trader either gets great probability or great risk/reward. The institution on the other side has to have a reason to take the trade, and they get something good if you get something good.

Although the Emini is Always In Long, the rally has been weak and this increases the chances that it is a bull leg in a trading range. If so, it might soon pull back to around the moving average and possibly form a double bottom. The bears want the weak rally to create a top for the high of the day. They need a strong reversal down with 2 – 3 consecutive strong bear bars, a new low of the day, and a breakout below the moving average.

Without all of this, the bulls will remain in control, and a pullback to near the moving average could be the start of a trend up. The initial price action has been weak, and this increases the chances that, if there is a bull trend, it will be a weaker type of trend.

Pre-Open Market Analysis
S&P 500 Emini: Learn how to trade the markets when oversold

I said that the Emini would try to rally after the sharp selloff to the bottom of the month long trading range, and it is up 24 points in the Globex session. I also have been saying that today is the last day of the month and the month would probably stay within August’s range because August was huge and it closed in its middle.

The third point I have been making is that today is the last day of the month, and the Emini might try to close near the open of the month to create a doji candlestick pattern on the monthly chart when the month closes at the end of the day. The open of the month was 1913.75. While that is 39 points above yesterday’s close, which is far, it is only about 15 points within the current Globex price, and it can easily be reached by the end of the day. Also, since this is a monthly candlestick pattern and dojis are almost never perfect, today could close 20 points below the open of the month, and the month will still be a good looking doji bar.

The point that the Emini is trying to make is that as bearish as August was, it closed back up at the monthly moving average, which means it became neutral by the end of last month. This month is an inside bar, which is another neutral pattern. With it probably closing near its open, it is another sign that the monthly chart is in balance around the current price.

The 60 minute chart is at the bottom of a tight channel, and the odds are that it would reverse up to the top of the channel. A bear channel is a bull flag and it has a 75% chance of a bull breakout. That breakout will probably come over the next few days.

Because the reversal up on the daily chart was so strong, the odds were that the 1st attempt by the bears to resume the bear trend would fail. This means that the selloff of the past 2 weeks was likely to be a sell vacuum test of the bottom of the range, and that the Emini would probably bounce.

After the bounce ends at some point in the next 1 – 3 weeks. the bears will try again. They will then have a good lower high on the 60 minute and daily charts, and a head and shoulders bear flag. The monthly candlestick pattern is an inside bar after a strong breakout below the monthly channel, and it is therefore a sell signal bar. This also increases the chances that the next leg down after the possible rally will lead to the 2nd leg down on the daily chart.

When there is a big gap up, the odds of a trend day are higher. Since the Emini is reversing up from the bottom of a trading range, and because the gap is to the upside, the odds of a bull trend day are slightly higher than the odds of a bear trend day. However, the bears still have about a 40% chance of a swing or trend down today, and those who trade the market for a living will be prepared to short, despite all the reasons above for a rally over the next few days.

Sometimes when there is a gap up, the Emini trends up from the open and has only very small pullbacks. These small pullback bull trend days only happen a couple of times a month. Traders who are learning to trade the markets need to be prepared to buy if today is one of those days.

Usually when there is a big gap up, the first leg up or down is limited and the Emini enters a trading range. There is often a double top or a wedge top, and a double bottom or a wedge bottom. The Emini then would be in breakout mode. Online day traders should look for a good buy signal bar near the bottom or a good sell signal bar for the top. If one forms, it can provide a good candlestick pattern for a swing trade that might last all day. The day trading tip today is to not have an opinion about the direction, but be ready for a possible trend day. If there is a strong breakout up or down with follow-through, be prepared for a trend.

Because the daily chart is in a trading range, traders have to expect disappointment. This means that if there is a trend, it might soon evolve into a trading range or have a late reversal. Be flexible and be prepared to trade whatever unfolds. Today should have good opportunities.

Forex: Best trading strategies

The EURUSD is in a tight trading range on the daily chart, and an even tighter range of the 60 minute chart. Swings up and down have been lasting only about a day. It sold off over the past 8 hours and is testing yesterday’s low. The bears want a breakout and a test of Monday’s low, and the bulls want a double bottom and then a rally.

The overnight selloff had a sell climax about 30 minutes ago and it was a bear breakout below the bottom of a 5 minute broad channel. The odds are that this bear breakout attempt will fail, especially since it is a test of yesterday’s low. This means that an early trading range is likely. The bulls will try to get a two legged rally up from yesterday’s low. The bears will try to get bear trend resumption down. The top of the bear channel is only 30 pips above and the top of the bear leg is only 40 pips above that, so if the bulls get their reversal, the swing up might not go very far.

The USDJPY last night retraced about half of the selloff of the past 3 days, and the rally had a wedge bear flag as its candlestick pattern on the 60 minute chart. The odds were that there would be a bear breakout below the rising wedge, and then a couple of legs sideways to down. The 5 minute chart has sold off over the past hour and it is creating that bear breakout. The 5 minute selloff is strong enough so that there will probably be at least one more leg down on the 5 minute chart. If the leg is strong, it would create a strong follow-through bar on the 60 minute chart and increase the chances of lower prices there as well.

Because the daily chart has an extremely tight range, online day traders are looking for reversals. They correctly expect all of these sharp legs up and down on the 5 and 60 minute charts to reverse. The downside target for the bears is yesterday’s 60 minute higher low around 119.60, which is only 40 pips below. The bulls hope for at least one more new high in the bull channel that began yesterday, and that would need only a 40 pip rally. Day traders should be looking to take profits if they get a 20 – 40 pips move in either direction, instead of holding all day, hoping for a protracted trend.

Summary of today’s S&P Emini futures price action and what to expect tomorrow

The Emini gapped up and sold off to a wedge bottom, and reversed up for the rest of the day.

Today was the last day of the month and the monthly candlestick pattern was a doji bar, as I mentioned several times lately as the likely outcome. The Emini revered up from the bottom of the trading range on the daily chart, and it might continue up for another couple of weeks, but it is still in a bear trend. Any rally is probably still part of a bear flag and a second leg down beginning sometime in October is likely. There is a 40% chance that the selloff is over and that the Emini will instead rally to a new high.

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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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.

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