Posted 7:31 a.m.
Today had 2 reversals in the first 5 bars, creating a breakout mode open. The yearly chart still has a 60% chance of having last year’s close tested this week, which means that we will see a 20+ point drop from here at some point this week.
The bears got a breakout but the follow-through was bad. The breakout was big enough so that the Emini is Always In Short, but the bad follow-through increases the chances that the swing down will be a bear leg in a trading range day rather than the start of a big bear trend day.
The bulls want a strong reversal up for the low of the day. They hope that the reversal up at the end of the 1st hour will be enough, but they need either a strong bull trend bar or a series of smaller bull bars to reverse the Emini to Always In Long. Day traders are open to anything, but expect limited follow-through up and down and will continue to mostly scalp until there is a strong breakout.
Pre-Open Market Analysis
S&P 500 Emini: Learn how to trade a tight trading range during the holidays
The week between Christmas and New Year’s Day usually has many tight trading ranges and often has some days that are entirely tight trading ranges. For example, a day might have a 5 point range. Day traders who trade for a living are expecting tight trading ranges and if they see lots of small bars, small bodies, overlapping bars, reversals after only 2 – 3 bars, they will conclude that the best way to make money is to buy below bars and strong bear closes in the bottom half of the range, and sell above bars and strong bull closes in the top half of the range. If this is what the price action looks like, traders learning how to trade the markets should wait for swing trades with stop entries.
Last week was also a holiday week, but had many days with good swings up and down. If that is this week’s price action, day traders will swing all or part. However, they will still expect reversals after 2 – 3 hours. If the leg is strong, they will wait for a 2nd signal before taking a reversal trade.
Since this is the last week of the year, computers will be aware of yearly support and resistance. Most charting software does not create yearly charts (charts where each year is one bar). However, the Emini is within 1% of the open of the year, which was 2020.25. Whenever a candlestick is about to close, and the yearly candlestick closes on Thursday, day traders know that support and resistance on that time frame can be important. If the Emini is close to support or resistance just before the bar closes, it usually tests the level. Since the Emini is down 8 points in the Globex session and within 23 points (about 1%) of the close of last year, and that is very close on a yearly chart, the Emini will probably get pulled down 1% to that magnet this week. Once there, it becomes free to do anything. It could break strongly below up, reverse up, or stay very close to it until the final minute of the trading year, and then decide whether to close a little above or below.
The year’s range was about 300 points. If Thursday’s close is within about 50 points of the open of the year, the year will be a doji candlestick pattern, which is a 1 bar trading range. It reflects trading range price action on lower time frames. Look at the weekly and monthly charts. They clearly have been in trading ranges for 2015. While it is possible that the year could close on its high and create a bull trend bar, the daily chart is already overbought, and a pullback over the next couple of days is likely. That would reduce the chances of a close on the high. Since the low of the year is more than 200 points away, the yearly bar will probably not be a strong bear trend bar. Most likely, it will close near its open and have a small bull or bear body. This would be a neutral candlestick pattern, and an accurate reflection of the year’s price action.
Thursday is also the final day of the month. Traders will watch for monthly support and resistance at the end of the week. So far, the month has a small body, and is another trading range bar, like last month.
Forex: Best trading strategies
The EURUSD has been in a trading range since the December 3 bull trend reversal on the 60 and 240 minute charts. Since it is near the top of the range, it will probably test the bottom of the range within the next week or two. That is about 150 pips below. If it gets there, the bulls will see a head and shoulders top (lower high major trend reversal), and the bulls will see a triangle. All trading ranges contain both a top and a bottom pattern. The reversal up on the daily chart was strong enough so that the odds still favor a 2nd leg up, even if the EURUSD first breaks below the 1.0800 neck line of the head and shoulders top. Reversal patterns usually have about a 40% chance of an actual reversal and a 60% chance of either a continue trading range or a reversal in the other direction.
The week between Christmas and New Year’s Day usually has many tight trading ranges and often has some days that are entirely tight trading ranges. Day traders who trade for a living are expecting tight trading ranges and if they see lots of small bars, small bodies, overlapping bars, reversals after only 2 – 3 bars, they will conclude that the best way to make money is to buy below bars and strong bear closes in the bottom half of the range, sell above bars and strong bull closes in the top half of the range, and scalp for 10 – 20 pips. If this is what the price action looks like, traders learning how to trade the markets should wait for swing trades with stop entries.
Last week was also a holiday week, but had many days with good swings up and down. If that is this week’s price action, day traders will swing all or part. However, they will still expect reversals after 2 – 3 hours. If the leg is strong, they will wait for a 2nd signal before taking a reversal trade.
The EURUSD has been in a 40 pip range in the European session. This is a tight trading range, and it is currently in the middle of its range. Day traders have been scalping overnight and will continue to do so unless there is a strong breakout up or down with good follow-through.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini had a weak selloff on the open that tested 60 minute moving average. It then rallied for 3 hours in a weak wedge channel.
As expected, today had quiet trading with most of the bars within tight trading ranges. There is still better than a 50% chance of a test of the close of last year at 2020.25 before the year ends on Thursday. The odds sill favor mostly quiet trading for the rest of the week, even though each day will probably have at least one swing trade.
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.
