Intraday market update: June 29, 2015
Learn how to trade a breakout

Posted 7:01 a.m.

The bulls reversed up strongly enough from the big gap down to make the Emini Always In Long. However, the follow-through on the 2nd and 5th bars was bad and it increases the chances of an early trading range. The bulls want to close the gap below yesterday’s low as a sign of strength. The bears want to keep it open, and they hope the gap down will become the start of a bear trend on the daily chart.

Although today could still become a bear trend day, these 3 big bull bars closing on their highs makes that unlikely, especially after 6 consecutive bear trend bars on the daily chart. The odds are that today will close above its open. The question is whether the rally will close the gap. It probably will not, but if it does, today will probably be a bull trend day. If not, it will probably be mostly a trading range day, which at the moment is most likely.

My thoughts before the open: Learn how to trade a breakout

The Emini gapped down big in the Globex session last night, but immediately reversed up from below the double bottom of June 9 and 15. A failed breakout should always be expected in a trading range.

I mentioned in the weekend blog that the daily chart had 6 consecutive bear bodies, and this is the type of price action that often happens within a trading range just before a bear breakout. However, the bears need a strong breakout below the March 2023 bottom of the range before traders will believe that the trading range has evolved into a bear trend. Without that, this is just another strong leg that will make the bears hopeful, and then again disappoint them.

The Emini has been in a bear channel and therefore a bull flag on the 60 minute chart, and it will probably gap down on the open. This is a bear breakout of a bull flag, and this fails within about 5 bars 80% of the time, and then reverses back above the top of the channel. Since the channel is so tight, the Emini does not have to go to far sideways or up to meets its objective.

There are a couple key price action patterns that traders will watch for the day. Will the Emini rally enough to close the gap below Friday’s low of 2086.25? Instead, will it form a bear trend day and close near its low and well below the June double bottom of 2062.75? After 6 consecutive bear trend bars, the odds favor that today will close above its open. However, if this is the start of the 10% correction, the price action might change to bear trend price action, which means that the gap down might become a measuring gap and the selloff could take the Emini below the March low. What is most likely? Whenever there is a trading range, the odds are that every breakout attempt up and down will fail, and that this one will as well. That does not mean that the Emini will then have a bull breakout. All that it means is that the Emini will probably reverse up soon and traders will see this move down as simply another leg within the trading range.

Since the monthly chart is so overbought and has an 80% chance of a bear breakout before the end of the year, price action traders will be quick to change from trading range price action to trend trading price action, but only after there is a strong breakout that has strong follow-through. This has not yet happened.

Even of the Emini has a strong bull close today, the bears will remain hopeful if the bulls are unable to close the gap this week. This is a seasonally strong time of the year through July 5, and this gives the bulls a slightly higher probability of being able to close the gap. However, if the gap remains open and big, it could be the start of the 10% correction. When the market has a big gap that leads to a big trend, it often goes sideways for several days as it decides whether the breakout will succeed or fail.

Emini daytraders today know that a big gap increases the chances of a trend day in either direction. Because the gap is down, the odds are slightly higher for a bear trend. Traders will be ready for a trend from the open up or down. The open will probably set the tone for the day. If there is a trading range for an hour or two, the day will probably be a trading range day or a weak trend day, like a trending trading range day. If there is a strong breakout in either direction with a series of strong trend bars, the odds favor a trend day.

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

The Emini had a small pullback bear trend day that closed below the bottom of the 2 month trading range. This bear breakout has more than a 50% chance of being the start of a 10% correction.

Today was a big bear trend day. Whenever there is a tight channel bear trend lasting all day, there is often follow-through selling in the first hour or two of the next day. However, after an extended sell climax like today, there is an 80% chance of at least a 2 hour trading range or rally early tomorrow, after any initial selloff.

Many traders see today as a big enough day to make the daily chart Always In Short. Some traders would like to see follow-through selling tomorrow or the next day before believing that the bears have taken control. If there is a big bull reversal tomorrow, then it can erase today’s bearishness. Without a strong bull reversal, the odds are that there will be at least a 2nd leg down from any rally, and there is better than a 50% chance that the pullback to the monthly moving average has begun. There is also about a 50% chance of a test of the October low, which would be more like a 20% correction.

Although this could be just another leg in the trading range, it is a big bear breakout bar that closed near its low and far below the 2 month trading range. It also formed in an extremely overbought bull trend. The odds at this point favor sellers on any rally and at least a 2nd leg sideways to down over the next week or two. The bulls would need either a very strong reversal up from here, which is unlikely, or a small double bottom after that 2nd leg down. Regardless, there is an 80% chance of at least a 10% correction this year, and this bear breakout is strong enough to have at least a 50% chance of being the start of that correction. Traders will look for any reason to sell.

Because this is the 7th consecutive bear trend day and that happens less than once a year, the odds are that tomorrow will close above its open. However, the odds also favor some kind of measured move down when there is such a big bear breakout and the context for a bear breakout is good.

Best Forex trading strategies

The Euro had a big selloff overnight, but reversed up early and has been in a bull trend on the 5 minute chart since its gap down last night. Because the monthly chart broke so far below its 10 year trading range, the odds favor a 2nd leg down. Since it is a monthly chart, it might take 10 or more bars (months) before that 2nd leg down begins.

The weekly chart of the EURUSD has a double top at the moving average, but the legs up are strong. This is a Big Down, Big Up, Big Confusion pattern, which means that more sideways trading is likely.

The daily chart is in a trading range. Even though it gapped down last night, if held above the May higher low, and it reversed up and is trying to form another higher low. This is after the June lower high, and the candlestick pattern is a trading range and a possible triangle. Until there is a breakout, there is no breakout. The buying pressure within the trading range is strong enough so that there is no sign on an imminent breakout, despite last night’s big selloff.

The reversal up last night formed a spike and channel bull trend candlestick pattern, and it has had 3 or 4 legs up. Traders learning how to trade the markets should realize that this usually means that the broad bull channel is in the process of evolving into a trading range.

While there is a 20% chance of a bull breakout and another leg up, those trading Forex markets for a living believe that a bull channel is a bear flag and there is therefore an 80% chance of a bear breakout. This does not mean a bear trend. It simply means that the odds favor a break below the channel instead of above. It can break below by simply going sideways. Usually, after the bear breakout, the market tries to test the beginning of the channel, which is the pullback that formed after the bull breakout, and it is around 1.1060.

Because there was such a strong trend and now there is about a 60% chance of a sideways to down swing in on the 5 minute chart, there will probably be an attempt to form a major trend reversal, which could offer good Forex trading for beginners.

The EURJPY and EURGBP have similar 5 minute candlestick patterns. The US dollar is in small trading ranges against all other Forex markets. Forex daytraders will be mostly scaling Forex crosses involving the dollar, but they will watch for swing trade setups in the EURUSD.

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.

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