Posted 7:13 a.m.
The Emini opened with a big gap down and then rallied. The rally had weak follow-through and it looks more like a bull leg in a trading range. Unless the bulls are able to create big consecutive bull trend bars, the odds are that there will be a bear leg that starts by the end of the 1st hour or two. The context is good for the bulls. However, they do not have a strong reversal up yet, and they might need a test back down and for a 2nd attempt at a base. The bears do not have a top. The Emini is Always In Long, but the rally is weak and just below the moving average. The odds are that it will be in a trading range for at least a couple of hours, and that there will be a lot of trading range price action today.
Pre-Open Market Analysis
S&P 500 Emini: Day trading tip is to be ready for a bull pain trade
The Emini has been trying to bottom above the January low for the past 3 days, but it has failed. It is down 27 points now in the Globex session, which traded below the January low. The Globex session reversed up from just above 1800, and is 18 points above its low. The odds favored a bounce early this week, and then a break below the January low. The bounce was small, and the Emini is now testing the low. Since the 60 minute chart is so oversold, it might now find its bounce at or slightly below the January low. With the 60 minute and daily charts so oversold, the Emini might instead rally after testing the January low, instead of rallying first and then breaking strongly below. The February rally on the daily chart might be the Final Flag in the February selloff. If so, the 1st reasonable target for the bulls is the top of the bear flag at the February 1940 high, which was a 50% pullback of the January selloff. The result would create both a double bottom and a double top on the daily chart, and the Emini would be back to breakout mode. At the moment, the probability favors the bears, but if the Emini gets back to the bear flag, the probability would once again be about 50% for the bulls and the bears.
The bulls need a strong reversal up, and it can occur early or late on the daily chart. The strong reversal up can begin with a one or two day strong rally starting today or tomorrow. Alternatively, there can be a weak rally that lasts for a week or two and looks like a bear flag. The bulls can then get a strong bull breakout above bear flag.
With the Emini being so oversold, the odds that the bears will get their strong breakout below the January low over the next few days is lower, and the odds of a bounce are greater than 50%. If there is no strong breakout within the next 2 – 3 days, the odds shift in favor of a rally off the January lows. If the rally is weak, it would create a bear flag, which would have about a 50% chance of a bull or bear breakout. If it is strong, the rally would probably continue up to around the February high. Day traders should be ready for a surprising strong move up over the next few days. They obviously are prepared for a strong move down, but the less obvious possibility is a rally, and that creates a possible pain trade up, which could be much bigger than traders expect.
Forex: Best trading strategies
The EURUSD is testing resistance at the October 22 top of the sell climax in the daily chart, and at measured move targets. The rally over the past 2 weeks is a micro wedge on the daily chart, and a wedge top on the 60 minute chart. The bulls are starting to take profits and the bears are beginning to sell. The odds are that there will be at least a 2 legged pullback on the 240 minute chart starting today or tomorrow. The 60 minute chart is at its high, but it has been sideways for 5 hours in the European session. This is a good location for the bears, and the price action shows that the bulls are becoming less interested in buying at this level at this time. The odds are that the EURUSD will pull back about 200 pips down to the bottom of the 60 minute channel around 1.1100 over the next couple of weeks.
Less likely, the rally will continue up to the October 15 high at around 1.1500 without the pullback.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini was in a trading range for the first 5 hours, and then reversed up sharply from a higher low major trend reversal after a few gap bars. The bull trend began just above the January low.
The reversal today was from just above the January low, which is important support, and from the 1800 round number. It created a bull reversal bar on the daily chart, but not a big one. Also, the strong rally had several pullbacks and did not get above the 60 minute moving average.
Just like all of the opportunities that the bulls had this week, they did not do as much as they could have with this one. It is enough of a reversal to lead to a rally for a week or two, but because of the bad follow-through on the 5 and 60 minute charts, and the small bar on the daily chart, the odds of a strong rally is less than it could have been. It is still very possible that this reversal will fail within a few days.
The bulls need strong follow-through buying. Otherwise, this short-covering will quickly be sold. The odds are that there will be follow-through buying over the next several days. If it is not strong, the bears will drive the Emini below the January low within a week or two.
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.
Dr. Brooks,
When scaling in as the market goes against you, traders have the option to exit all at their original entry price, exiting BE on their first entry and with a profit on the others. However, they also have the option to hold as the market goes beyond the original entry, or to only take some of the position off when the market returns to their original entry.
How do you make this decision (whether to exit or hold when price returns to original entry)? Could you explain the math?
Thank you,
Michael
Hi Michael,
Don’t know if you are in Al’s room but your query was partly covered in yesterday’s Q&A session. I will put it up on the Ask Al blog sometime later, but if you have video, it starts at 02:32:00.
However, quite by chance, the next Ask Al video extract this weekend has Al giving three specific decision scenarios that answer your query well. Not a math issue, other than your own scale-in calcs, but decision rests on your reading of the market context and price action. No surprise there, right? Different traders will choose the scenario that suits their own PA analysis. If you have room video, the segment is at 02:24:10 for 17 AUG 2015.
So watch this weekend’s upcoming Ask Al, but for now, the 3 decisions are:
(1) disappointment – getting out BE on whole trade.
(2) swinging whole position, and
(3) the ‘middle ground’ taking profit (or BE) on part and swinging the remainder.
The middle ground is Al’s usual preferred approach.
Yesterday’s room Q&A dealt with taking a loss based on reading PA gaps.
Hope that helps.
Richard
PS. Excuse me for answering for Al again, but it is not really practical for Al to answer broad, general questions that are already answered in the course videos, as they take too much of Al’s time to type out an appropriate answer. Al needs very specific questions related to today’s chart. But even then, I may have to jump in and answer as Al needs his spare energy to complete new course!! You can get good advice from other BPA traders in Al’s other site forum too.
@Michael just to echo what Admin says, please start a thread over at the forum as we love to discuss this stuff and can post charts to better illustrate our points! Thanks