Intraday market update: February 17, 2016
Learn how to trade overbought price action

I will post around 7:03 a.m.

The Emini gapped up and tested the top of the channel, but did not reverse down strongly. The 60 minute chart is overbought and TBTL sideways to down is likely to begin today or tomorrow. The bulls want the tight channel to continue up for many more days. That is a low probability bet. The odds are beginning to favor a pullback. The bears need either a clear top or a strong bear breakout. Until then, there is an important magnet above at the February high of 1940. However, the odds favor a pullback starting today or tomorrow, and bulls will begin to look to buy pullbacks instead of new highs.

Pre-Open Market Analysis
S&P 500 Emini: Learn how to trade overbought price action

The daily chart had 3 bull trend days up from the bottom of the 2 year trading range, and the weekly chart is forming an entry bar above last week’s buy signal bar. Everyone clearly sees the major lower high of 1940 as the magnet that is drawing the Emini up. It is the high of the month and a 50% retracement of the January selloff. While it might not get there before breaking below the trading range, the momentum up is strong enough so that traders believe that the 1st reversal down will be bought. The 60 minute chart has rallied for 16 bars in a tight channel and no more than a 1 bar pullback. Although this is a strong bull trend, this is extreme and therefore unsustainable. The odds are that there will be a sideways to down pullback lasting about 10 bars (a day and a half) before the end of the week. The bulls see yesterday’s gap up as a measuring gap, and the projection up is close to that February 1 lower high. The Emini is up 15 points with less than an hour to go before the day session opens. If it opens here, it will gap up again. The bulls want a repeat of the October rally. Because the January selloff was so strong and it again tested 1800 for the 4th time in 2 years, traders are correctly wondering if the market will run out of buyers at that level. If it falls below, that 2 years of support will be strong resistance, and the Emini might fall 300 points for a measured move down. With the 60 minute chart as overbought as it is and with a pullback likely this week, online day traders will be ready to sell a reversal down from above a prior high high. Will that come on the open or by the end of the 1st hour or two today? It might because bulls who bought last week’s low have a big profit. They also see February as a trading range. Trading ranges often have deep pullbacks. Most bulls are not confident that the Emini will break above the February high. With a deep pullback possible, swing bulls need a stop below last week’s low. Most traders will not risk that much. How do they reduce their risk after a big, fast move up? They reduce their position size. If bulls reduce their position size, they sell out of some of their longs. The bears are always selling. If the bulls also start to sell (to take profits), the market usually pulls back. The bulls want to buy again lower, believing that the 1st pullback will be bought. They want to wait about 10 bars and for a couple of legs down before buying to be sure that the pullback will not instead be a bear trend reversal. Ten bars on the 60 minute chart is about a day and a half, which is a common duration for a pullback in a strong rally. Momentum bulls keep buying as long as the momentum is strong. As soon as it weakens, they are quick to sell. The result is that a reversal down can be fast and big, and it can start at any time. Yes, the trend is up on the 60 minute chart, but if there is a reversal down today or tomorrow, it can be a good swing trade. The bears need a topping pattern or a strong bear breakout with follow-through. The bulls have the problem of the Emini being overbought. Many day traders do not want to buy too far above the moving average in an overbought market. They will, however, if there is a strong bull breakout with follow-through. It is usually easier for bulls to make money late in a bull trend by buying pullbacks. Once enough traders switch to buying pullbacks instead of new highs, pullbacks begin because there are not enough traders left who are buying highs to overwhelm the bears who are selling them. This transition will probably begin this week, and possibly today.

Forex: Best trading strategies

The 60 minute chart of the EURUSD is close to the bottom of the February pullback to around 1.1100. That was the start of the wedge rally that ended last week. I wrote at the time that the odds were that there would be a 2 legged pullback that lasted 10 or more bars on the 240 minute chart (the biggest time frame that shows the wedge top). The 60 minute chart has pullback for more than the minimum number of bars, but it has had only one leg down, there is no clear bottom yet, and there is still room to the 1.1100 target. The EURUSD has been sideways for 2 days. When there is a tight trading range in an oversold bear trend, like on the 60 minute chart, it is often the final bear flag. This means that a bear breakout usually does not fall far before it is bought and there is then a rally. The selloff was strong enough so that a rally will probably be sold and there will then be a test back down to the low of the 60 minute bear trend. A bear rally often reaches 50%. If the rally begins today or tomorrow, a 50% bounce would be around 1.2500. The bears would look to sell it, hoping to form a head and shoulders top after the wedge top. The rally after a wedge top often tries to convert the pattern into a hear and shoulders top, with the 2nd push up in the wedge becoming the left shoulder. While it is possible for the 60 minute bear trend to continue indefinitely, the channel down has been tight. That is unsustainable and therefore climactic. This increases the chance of a bounce coming soon, like today or tomorrow. The tight trading range of the past 2 days is sloped down slightly and it is therefore also a weak bear channel. Look at what has been happening with each new low for 2 days. Traders have been buying each one. Bears are taking profits on breakouts to new lows, instead of selling the breakouts. Bulls are buying the new lows because they are confident that the EURUSD will not fall too far near-term. This price action is a sign that the selling might be drying up at this price level and that there might have to be a rally to reach a price where traders are more willing to sell. The EURUSD has been in a bear trend on the 5 minute chart in the European session, but it has fallen only about 80 pips in 6 hours, which is not much. The NYSE opens in 15 minutes and the EURUSD is at the bottom of the range. If there is a bear breakout, the 2 day trading range will likely be a magnet and the breakout will probably not fall far before it is bought. That could be the start of a 2 – 3 day weak rally to a lower high on the 60 minute chart, which is likely to begin this week. Less likely, the 60 minute tight bear channel will continue for several more days.

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

The Emini had another strong bull trend day, but it went sideways after a wedge top.

The Emini tested into the gap and reversed up sharply. On the 120 minute chart, there has not been a pullback in 13 bars. That has not happened in over a year and it is a sign of how overbought the 60 minute and 120 minute Emini charts are. There is probably a 70% chance of at least a couple of hours of sideways to down trading and maybe an 80% chance that the 120 minute chart will trade below the low of the prior bar at some point tomorrow. It is possible that the Emini continues to get overbought and breaks strongly above the February 1 high of 1940 tomorrow, but it is more likely that it will not, and that it will have to pull back before it can get the bull breakout, if it is going to get the bull breakout.

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.