Posted 6:51 a.m.
The Emini opened with the biggest bear trend bar of a 30 bar bear trend. This was more likely an exhaustion gap than a measuring gap. However, when the channel is as tight as it is, the first reversal up usually forms a trading range and not a trend reversal. The bulls usually mostly scalp. After a test down, they then are more willing to swing trade, and they have a chance of creating a major trend reversal.
Bulls and bears know that the odds favor at least 2 legs up and about 20 or more bars up starting at some point in the first couple of hours, but the selling has been so strong that the bulls will probably need at least a micro double bottom before the process begins, and then they will probably need a major trend reversal. The bears know that the downside will probably end within the first hour or two and that the day will then convert into a big trading range, but they will continue to sell until there is clear evidence that they bulls have taken over.
My thoughts before the open: Pullback before another breakout attempt
As I mentioned last week, the Emini might form a double top after forming the two week long double bottom. I also said that it would probably pull back, which it did on Friday. What usually happens at this point is that the market tries at least one more time to breakout above the top of the trading range. This means that Friday was a pullback before another breakout attempt, and that Friday’s selloff was the handle in a cup and handle buy setup.
On the 60 minute chart, the pullback is simply another higher low in the broader bull channel of the past 7 days. The bulls are still hoping for a successful breakout above the top of the month long trading range, and then a measured move up. The bears want the double top of the past 2 weeks to be followed by a bear breakout and then a measured move down. Until there is a breakout, neither side is in control for more than a day or so at a time. Most breakout attempts fail, and if today rallies, it will probably be another failed attempt.
However, one attempt will eventually succeed. Until there is a clear breakout with follow-through, most traders will be quick to take profits and they will trade in both directions, buying low, and selling high. This is how trading ranges form, and it is why traders should primarily look to trade that way once they see a trading range…it is what the institutions are doing.
Was Friday’s late selloff strong enough so that there will be enough trapped bulls above to create a 2nd leg down on the 60 minute chart? We will find out this morning. The bulls are hoping that Friday is simply a bear channel and a sell climax, and therefore a bull flag. They expect a bull breakout and at least 2 legs up today on the 5 minute chart.
Summary of today’s price action and what to expect tomorrow
As expected after yesterday’s sell climax, today rallied for at least 2 legs and 20 bars. The rally, in fact, lasted all day and it was in a broad bull channel.
After early follow-through selling, the Emini reversed up for at least 2 legs and 20 bars. The bull channel lasted all day. The first bar of the day was a tell. It was the best looking bear bar, but occurring late in a bear trend, and it was breaking below a steep bear channel. This made the odds favor an exhaustive sell climax, especially since a rally was likely after yesterday’s sell climax.
I said last week that I thought the Emini would pull back and then try again to breakout above the double top. At the moment, it looks like it will try tomorrow. The bears want the double top to hold and then break below the low and fall for a measured move down. The bulls want the double bottom of the past two weeks to lead to a measured move up. The market is in breakout mode. There is about a 50% chance that the breakout in either direction will succeed and a 50% chance it will fail and reverse.
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.
