Posted 7:12 a.m.
Friday’s tight trading range has been continuing. Traders are waiting for a breakout above last week’s lower high of 2115, or below yesterday’s low. The Emini is still Always In long, but this is meaningless when it is in a tight trading range. Swing traders have to wait for a strong breakout up or down. Scalpers are mostly entering with limit orders, buying below bars and selling above. Most traders should wait for the breakout. If there is good follow-through, they will trade in the direction of the breakout. If there is bad follow-through, they will look for a reversal. It is possible that the tight trading range will last all day, but it is more likely that there will be a breakout within the first hour or two.
My thoughts before the open: Day trading strategies for a possible lower high
As strong as the bull trend reversal in the S&P Emini futures contract was last week, traders learning how to trade the markets need to notice that it did not go above the May 4 high, and that the May 4 high did not quite go above the all time high of April 27. Also last week’s low fell below the low the April 30 low.
The 60 minute chart has been in a trading range for 3 months. Every trading range has both buy setups and sell setups. These slightly lower lows and highs constitute the sell setup. They are the beginning of a bear channel. Until there is a breakout, there is no breakout. However, if there is a bear breakout before the Emini rallies above last week’s high, traders will look back and conclude that these lower highs and lows were the beginning of the bear trend.
Traders looking to swing trade this candlestick pattern on the 60 minute chart have an unusually good risk/reward ratio. Their stop is just above last week’s high, which means they are risking 5 – 10 points, and their target is the bottom of the 60 minute trading range, which is 40 points below, and then a measured move down, which would be about 100 points.
If a swing trader is going to trade this price action pattern, what does he have to conclude about the probability? Because the Emini is in a trading range, the bulls and bears are closely balanced, and neither has a big edge. If the bears have an exceptional risk/reward ratio, there has to be a reason for bulls to take the other side of the swing trade. Their reason is that the probability is always small when the risk is small (and the risk/reward ratio is high). This means that the odds are that shorting up here for a huge reward is a low probability trade. However, the reward is so much bigger than the risk that it more than offsets the low probability. This makes the Trader’s Equation positive.
So why doesn’t everyone take this short? Many traders do not want to lose 70% of the time because it is not fun, and because you have to be perfect on the 30% of the trades that you win for the trading strategy to work. That is difficult to do. Most swing traders prefer to wait to see a strong bear breakout and then short. At that point, the probability of making money is higher, even though the stop is further way, making the risk bigger.
Friday had a big gap up and stayed always in long, despite the tight trading range that lasted all day. The Globex Emini contract is trading within that range. There probably will be a breakout up or down today, but most tight trading range breakouts do not go very far, even though the breakout will probably have 2 legs and reach a measured move based on the height of the range.
Until there is a breakout, the day trading tip is to either buy low, sell, high, and scalp, or to just wait for the breakout and then swing trade the Emini.
Forex trading strategies for today
Traders who are trading Forex markets for a living see that the strongest markets in the European session were the Pound and the Canadian dollar. The best Forex trading strategy for online currency traders is to look for swing trades in those markets. However, traders learning how to trade the markets will notice that even those moves were not very big, and most traders will end up scalping today. This is especially true after last week’s buy climax in the EURUSD on the daily chart. A buy climax is usually followed by a tight trading range for at least 5 – 10 bars (days).
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The S&P Emini futures contract was in a broad bear channel. Since it closed in its lower half and Friday was a gap up at the top of a trading range, tomorrow might gap down and create a 2 day island top.
Although tomorrow might gap down and create a 2 day island top in the Emini, traders learning how to trade the markets must realize that gaps up and down, as well as island tops and bottoms, are common within a trading range. Yes, once there is a breakout of the trading range, traders will point back to some gap and claim that it was obviously a great entry, but that is not true.
As long as the Emini remains in the range, it will constantly form tops and bottoms and none is high probability, except in hindsight. Simply look back at the daily chart over the past 3 months. You will see many tops and bottoms, and all failed. The odds are that the current top will fail as well, although the monthly chart is extremely overbought and a 10% correction within the next several months is likely.
Although the Emini today was in a bear channel and therefore a bear trend, it lacked momentum. Bulls see a bear channel as a bull flag and expect at least a couple of legs up tomorrow. The bears want a gap down and then a bear trend day. With Friday and today having very little conviction, the odds are against a strong bear trend tomorrow. However, if the Emini gaps down and has a strong bear breakout in the first couple of hours, it could be a bear trend day instead of the more likely trading range and/or reversal of today’s weak selling.
Forex price action for tomorrow
The British pound was strong and the Yen was week, but most of the trading today was scalping with limit orders. The Forex trading strategy will probably be the same tomorrow since the dollar is so overbought on the weekly charts, and the Euro is overbought on the daily charts. Big up, big down, so confusion, which means trading range price action.
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.
Thanks, Al. I rely on your thoughts and strategies each day to help me plan and set my strategy for my day of trading.
Joe