Posted 6:55 a.m.
The Emini broke above the top of the bull channel on the open and it formed a new all-time high. However, the rally lacked consecutive big bull trend bars. Also, yesterday was in a tight channel for 4 hours, and that is extreme behavior.
Although the Emini is always in long, it will probably enter a trading range within the first hour or two. A trading range means that the pattern of higher lows ends, and it requires a pullback below a prior higher low. The pullback might look like a bear trend reversal, but the first attempt to reverse the trend will probably be bought and the result will be a trading range.
Since the Emini is still in a bull trend, bulls will buy pullbacks. The initial rally has been weak, which means that bulls are hesitant to buy too high. It is still to early to short, but bears are willing to sell if there is a second entry short or a strong reversal down. If a trading range forms, bears will look for a major trend reversal. However, they probably need much more selling pressure before they have a chance at a bear trend.
My thoughts before the open: Double top or bull breakout
Yesterday ended with a small pullback bull trend. It was strong enough so that the Emini will probably test the all-time high today. Over the next several days, it will decided between a bull breakout and another leg up, and a double top with the December 26 high. Because a bull trend resists reversals, the odds slightly favor higher prices near term, but the monthly chart is so overbought that the upside is probably limited. The bears have sold every new high for over a year, and each reversal down fell well below the breakout point. This has created a broad bull channel on the daily chart. Bears will continue to «scalp» shorts on the daily chart, scaling in above prior highs. Bulls will continue to buy pullbacks and swing traded, and they take partial profits at new highs.
Because yesterday was in a tight bull channel for 60 bars, it is over-extended. This increases the chances of at least a 2 hour trading range or pullback at some point, and it will probably begin within the first two hours. However, because there was no top, there will probably be some early follow-through buying. The Emini will probably have a small gap above the channel and test the all-time high. Since most breakouts above bull channels fail, further upside will probably be limited and the market should quickly reverse back down to the bottom of the channel. Since the channel is tight, the bottom is close and the selloff is more likely to be more sideways than down.
A lot of trading range trading is likely today, but because the market is testing an important resistance level, traders will be ready to swing trade up or down if there is a strong breakout or reversal.
Summary of today’s price action and what to expect tomorrow
The Emini broke above a bull flag, and then reversed down, as usually happens. The early trading range tested to a new low of the day and then closed at a new all-time high.
The Emini closed at a new all-time high. The 60 minute chart was in a 14 bar bull microchannel, which is extremely unusual. This means that it was climactic and therefore unsustainable. After a brief, mid-day selloff below the 60 minute bull microchannel, the Emini rallied, as is usually does after a bear breakout below a microchannel However, the rally usually goes for a few bars and then it typically followed by a bigger correction. Since I am talking about the 60 minute chart, I mean that there might be follow-through buying for an hour or two on Tuesday (Monday is a holiday), it is likely to have a TBTL (10 bars, 2 legs) correction on the 60 minute chart on Tuesday or Wednesday.
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.
