Posted 7:01 a.m.
The Emini broke out above the month long trading range and has found sellers. The 3rd bar of the day was a credible sell signal bar and put the market always in short for a failed breakout above the 5 minute bull channel and yesterday’s high, and a failed breakout above the month long trading range. The next bar was a bull trend bar and a possible opening reversal at the moving average.
The Emini is in a tight trading range, which means the probability is low for stop entries. The bars are very big, which means the risk is big. This is a limit order market. The range is big enough for it to be half of the day’s range. The market is in breakout mode and will probably have a measured move up or down. As long as it stays below the high of the big reversal bar, the odds favor the bears. However, the tight trading range tells us that the odds are only slightly in favor of the bears.
Since it is a limit order market, traders need to be patient and wait for a strong breakout with follow-through in either direction before swing trading.
My thoughts before the open: Bull breakout of the trading range
In the premarket, the Emini is trading a couple of points above the month long trading range. It reversed up this week after breaking below the trading range, turning the range into a possible wedge bull flag on the daily chart. Even though it might successfully break above the range today, traders have to remember that 80% of breakout attempts fail. Unless there is a strong breakout with strong follow-through buying, this breakout will probably fail as well.
If so, the trading range will then evolve into some other credible topping pattern because all trading ranges must always have both a topping pattern and a continuation pattern within them. This is because they are in breakout mode, which means that the chance of a successful breakout and a new trend is about the same for the bears and the bulls.
Today has the potential to be a big trend day up or down. However, there has been little energy in the market over the past few days, and the week long rally is evolving into a broad bull channel. This is usually followed by a trading range. This means that the 5 minute bull trend will probably soon become a trading range, just like there has been a trading range on the 60 minute chart for the past 3 months. Bulls naturally get excited and hopeful near the top, just like bears do at the bottom. However, until there is a clear breakout, there is no breakout.
At the moment,the odds favor a breakout above the month long range. Traders will assess its strength and will be prepared for a trend in either direction, knowing that more 5 minute trading range price action is most likely.
Summary of today’s price action and what to expect tomorrow
The Emini broke above the top of the month long trading range and above last month’s high, but then formed a lower high major trend reversal. There were two legs down, and the Emini reversed up from the 60 minute moving average to close at last week’s high.
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See the weekly update for a discussion of the weekly 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.
