Posted 7:26 a.m.
The Emini had an opening reversal up from the 15 minute moving average. It also had a few moving average gap bars. When they form late in a bull trend, they often lead to the final bull leg before an attempt at a major trend reversal. However, there has been weak follow-through buying. Although the Emini is Always In Long, the gap bars, yesterday’s tight trading range, and the weak follow-through in today’s rally all increase the chances that this rally will become a bull leg in a trading range.
Follow-through buying after buy climax days usually lasts 1 – 2 hours, so traders will expect that today. They then will look for a possible major trend reversal and a swing down for a couple of hours. The odds favor a lot of trading range price action after yesterday’s buy climax, today’s gap bars, and today’s weak rally. While it is possible that today could be a strong follow-through bull trend day, or a strong bear trend day, it is beginning as a trading range day. Also, 60% of major trend reversals are followed by big trading ranges.
If there is a strong breakout with strong follow-through up or down, traders will change their minds. Until then, they will take at least part off whenever they have 2 – 4 points profit, and they will look for reversals, especially if there is a second signal (like the buy on the open).
Pre-Open Market Analysis for August 18, 2015
S&P 500 Emini: Trading price action after a buy climax
After yesterday’s buy climax, the odds were that the Emini would have at least 2 hours of sideways to down trading today. However, there is often follow-through buying for the first hour or two before the pullback begins. The July lower highs are the obvious resistance areas above. The bears want a double top bear flag on the daily chart, which would also be a lower high major trend reversal. The bulls know that the bears see the selloff from the all-time high in early July as a broad bear channel. The bears need lower highs. If the Emini goes above that July lower high of 2108.50, the the bear channel argument becomes much weaker, and traders will instead conclude that the bears have failed. Instead, they will see the rally that began last week as either the resumption of the trading range or the start of a bull trend that will lead to a new all-time high.
Since all breakouts up and down have failed for 7 months, the odds are that the rally would just be another leg in the trading range. With the monthly chart as overbought as it is, a breakout up or down is likely within the next few months. If there is a bull breakout, it will probably fail within a month or two because there is an 80% chance that the Emini will fall to its monthly moving average this year, which requires at least a 10% selloff.
The Emini has been trading down in a weak bear channel overnight, and it is currently down about 4 points. The 5 minute chart yesterday had a spike and channel bull trend, and the 1st target for the bears is a test of the bottom of the bull channel, around 2091. The target for the bulls is the July lower high.
Since the pullbacks were small yesterday, traders learning how to trade the markets should realize that the bull trend was strong enough to make the odds favor an attempt at follow-through buying at some point today. Because the channel was tight and the targets above are close, at the moment, the odds favor the bulls getting a test of the July lower highs this week, even if there is a two hour trading range or pullback today.
The bears probably need a trading range lasting a couple of hours before they get a reasonable chance of a bear trend day. They would try to create a major trend reversal in the trading range, and then a bear breakout. Alternatively, they might get a strong bear breakout at any time, even without a trading range, but this is less likely.
Forex: Best trading strategies
The Pound was strong overnight, and the Euro was weak. Although the 5 minute chart of the EURGBP is forming a double bottom, the selloff was strong enough to make follow-through selling likely after any pullback. Swing traders will look for at least 50 pips down.
The GBPUSD is barely breaking above the July trading range, and the rally on the 5 minute and 60 minute charts is strong enough to make higher prices likely. The bears are trying to form a double top on the 5 minute chart, hoping for a failed breakout of the trading range, but the best they probably will get is a bull flag on the 15 minute chart. Those trading Forex markets for a living expect at least some follow-through buying.
The EURJPY is in a spike and channel bear trend and although the bear channel has had 3 pushes down in a wedge, there is no sign of a reversal. The bear trend is still strong, but this is a sell climax. Traders learning how to trade the markets should be ready for an attempt at a bottom today or tomorrow. Because the selling is so strong, the best the bulls might get for the 1st few hours is a trading range. They then would try to create a major trend reversal within that range. Until there is a bottom, it is better to sell rallies.
Bulls see this selloff as a pullback from the rally of the end of July to test of the top of the July trading range. Bears see it as the start on a swing down from the top of the larger trading range that began in April.
The 240 minute chart of the EURCAD is overbought and in a channel. The bears are hoping that last night’s selling is the start of a bear breakout below the channel. If they are successful, downside targets are prior higher lows, especially the early August higher low around 1.4300, which is about 140 pips below. The 5 minute chart is having a strong bear breakout over the past 15 minutes and it is likely to lead to a swing down. Traders learning how to trade the markets should look to sell.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini had a wedge lower high major trend reversal. After a spike and channel bear trend, it reversed up from the bottom of yesterday’s bull channel and from the 60 minute moving average in a wedge bottom.
The Emini was in a trading range today. The bulls are hoping that this is a pullback from yesterday’s rally and that the Emini tests the July high tomorrow. The bears want the selloff from yesterday’s high to be a lower high in a bear channel. Last Wednesday’s reversal up was strong enough so that the bulls have higher probability. Since the Emini is in a trading range, pullbacks can be deep, and this pullback can test down to close to last week’s low. However, that is not likely. If the bulls are in control, the bulls should get a rally tomorrow or Friday.
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.
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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.
All bull flags that are not sideways are bear channels, but not bear trends. If the channel at any point has a strong bear breakout with follow-through, that would be the bulls giving up. The market then would be in a bear trend.
I think of all bear channels as bull flags because most have a bull breakout. About 25% of bear channels have a successful bear breakout, which then becomes a measuring gap. The opposite is true of bull channels. They are bear flags and about 75% have bear breakouts. If instead there is a strong bull breakout with follow-through, then the market is back to a breakout phase, which usually is then followed by another bull channel.
Hello Al, at what point does a bull flag turn into a bear channel? Both the Dow and Russell have had four+ pushes in both directions. Thank you.