Posted 7:07 a.m.
Today began with reversals around yesterday’s close and in the middle of yesterday’s trading range. This is a limit order open and it increases the chances of another trading range day. Three of the past 4 days have been dojis. There have been no pullbacks and the Emini is near the top of a trading range on the daily chart. The odds are that it will pull back today, which means trade below Friday’s low. With the limit order start, the odds also are that today will have a lot of trading range price action. Until there is a strong breakout up or down, traders will continue to bet on reversals and they will mostly scalp. Many will use limit orders. Although today might become a strong trend day, it will more likely mostly be a trading range day.
Pre-Open Market Analysis
S&P 500 Emini: Learn how to trade a breakout attempt
The Emini reversed up strongly last week. It formed an outside up bar on the weekly chart, which that closed above the high of the prior week. However, the Emini is still below the November high, which was the top of a strong bull swing, and below the all-time high of 2117.00. Both resistance levels are within about 30 points, which is close enough for the Emini to break out any time within the next week or two. This week will give day traders a chance to learn how to trade a breakout attempt.
If the bulls get their breakout, their ultimate target is a 350 point measured move up, based on the height of the yearlong trading range. The odds of a significant breakout of 100 points or more will be greater if the breakout comes in the form of a series of 2 – 5 consecutive bull bars closing near their highs, especially if most of the bars have big bodies. If the breakout is made of small bull bars, or strong bull bars where each is followed by a bear bar, the odds are that the breakout will not go far before the Emini reverses back down into the trading range.
The bears prefer that any rally this week stays below the November high. They would see this as a sign that they were strong enough to stop the bulls from reaching a small goal that strong bulls should have been able to reach. The lower high, even though it would look like just the top of a leg in a trading range, might be the start of a broad bear channel, which is a bear trend. Some bear trends begin as big, broad trading ranges that have 3 or more strong rallies, and each fails to get above the top of the prior rally. Eventually the bulls conclude that there are too many strong sellers at this price, and they bulls stop buying. They then only want to buy a much lower price. The absence of buying can create a strong bear reversal that can break below the bottom of the trading range.
Just like the bulls want a 350 point measured move above the yearlong trading range, the bears want a 350 point measured move below. This would be around 1500. At a minimum, they would like a strong breakout below the October 2014 and October 2015 double bottom and at least a 100 point selloff to below the monthly bull trend line.
The Emini bulls were strong last week, but Thursday and Friday were small doji days. This is a sign of exhaustion. The bulls will again try this week to get above the all-time high. There are 5 trading days left this month and the month is a big doji bar so far on the monthly chart. November is the follow-through bar after October’s strong bull bar, and the bulls want a bull body. The bulls will try to make next Monday close above the open of the month to create the bull body. This would be a sign of strength.The bears want a bear body. They prefer the month to close on its low. That is unlikely, since the low is 70 points below the current price.
The 60 minute chart has had 3 pushes up over the past 2 weeks. This is a potential wedge top. Instead of reversing down for a couple of legs, Friday went sideways. This increases the chances of another leg up today or tomorrow. The rally could easily get above the all-time high, creating a breakout above the yearlong trading range.
The Globex chart had a 10 point selloff and then an 8 point rally overnight. Neither move was strong. This is trading range price action, and it follows 2 trading range days. The Globex chart is currently unchanged from Friday’s close. Friday ended with a reversal up out of a bear channel. This was the start of a bull breakout above a bull flag. The breakout was not strong. The bulls need a stronger breakout. Without it, the trading range will continue. If it does, and if the bulls continue to break above the all-time high, bulls will begin to exit and look to buy lower. Bears will look for topping patterns or strong bear breakouts within the trading range and they will short.
The 1st target for the bears is around last week’s low. If the Emini tests down to that level, it will have formed both month-long a double top and a double bottom on the daily chart, which would then be in breakout mode, just as the weekly and monthly charts are in breakout mode.
Day traders this week will continue to be quick to take profits until there is a clear bull breakout or bear reversal. The swings up and down on the 5 minute chart have been big enough for swing traders to hold positions for 4 or more points. Scalpers have done very well, especially with limit orders, betting that every breakout up and down will continue to fail. Since the Emini is at an important price level and at the end of the year, those who trade the markets for a living will be prepared for a possible big move up or down. Traders learning how to trade should be prepared for the breakout so that they will not be in denial when it happens. They should trade a small enough position to compensate for the wide stop and uncertainty. This will give them a better chance of profiting from the breakout, which can last a long time.
Forex: Best trading strategies
The EURUSD daily chart is continuing down in its attempt to test the April high low, or the March low. The selloff over the past month has had many big bear trend bars, but each has had bad follow-through. This is more common when a bear trend is beginning to convert into a trading range than when it will fall much further.
The 240 minute chart has fallen in a channel after the October 22 strong bear breakout (spike down). A spike and channel pattern usually evolves into a trading range. There have been several new lows over the past 2 weeks, and bull buying at and below the prior low have made money. In strong bear trends, it is usually difficult for bulls to make money. When bulls are consistently able to make money in a bear trend, the trend is usually beginning to convert into a trading range.
The 240 minute chart is still making lower highs and lows, and it is still in a bear trend. The 1st target for the bears is the April low, which is now only 80 pips below last night’s low. The EURUSD can get there this week and still be within the bear channel. However, the EURUSD 240 minute chart is so oversold that it can break above the bear channel and its lower highs at anytime. If it does, bears will see the end of the lower highs as the start of a trading range, and they will take profits. Bulls will see this as a potential start of a swing up that could last a couple of weeks or more. They will become more willing to hold onto their longs and more eager to buy pullbacks. The first target for the bulls is last week’s lower high above 1.0800. If they can break above that, the next target is the top of the bear wedge channel, which is above 1.1000.
The EURUSD is still in a bear trend on the 240 minute chart. However, a wedge channel has a 75% chance of a bull breakout followed by a 1 – 3 week trading range or swing up, and only a 25% chance of a bear breakout and acceleration downward. There is no clear bottom yet. However, traders should be ready for a bull breakout that will probably begin this week. If it is strong, the bulls might get their targets. If it is weak, the bears will see it as a trading range. They will sell the bear flag and expect a drop below the March low.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini was in an almost flat tight bear channel after a brief rally on the open. It sold off below yesterday’s low and the moving average, and reversed sharply back up, creating a trading range day.
The Emini had 3 dojis out of the past 4 days and it was near the top of its trading range on the daily chart. Today was likely to trade below yesterday’s low. Once it did, the buyers returned, in part because of a 60 minute 20 gap bar buy setup.
Today is the 3rd consecutive doji bar on the daily chart. The bulls want a new all-time high, and the bears want a test of last week’s low. With 3 sideways days and many big reversals, neither side has been able to maintain control. Tomorrow will probably be a trading range day as well, but because the Emini is at resistance and overbought, it could have a strong move up or down tomorrow. More trading range price action is more likely.
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.
