Emini sell climax after buy climax creates confusion, which typically results in a trading range
Pre-Open market analysis
Tuesday was a huge bear day after a buy climax in late November. Big Up, Big Down creates Big Confusion. Traders buy low, sell high, and take quick profits. This generally results in a trading range.
The Emini has been in a trading range for a year, and in a tight range for 2 months. There is no breakout until there is a breakout, despite strong moves up and down.
Last year’s close has been a magnet all year. The Emini might oscillate around it for the rest of the year. Today will open below last year’s close. Therefore, the Emini might get vacuumed back up there in the remaining days of 2018.
Options gamma and sell vacuum test of support
Tuesday collapsed on the 5 minute chart. It was a quick down to the support of last year’s close. Whenever there is an intraday crash, about half of it is caused by option selling firms having to hedge their short puts. As the market falls, the losses from their short puts rapidly increase. Gamma is the measure of the speed of those losses.
When the gamma increases rapidly, those firms have to protect themselves. They can do this by selling stocks and futures. Their selling adds to the selling from the bearish institutions. The result is a bigger bear day than what the fundamentals would indicate. Gamma-related selling is often about half of the selling in sell climax days, like Tuesday.
Overnight Emini Globex trading
The Emini is down 40 points in the Globex session. It will therefore gap down below last year’s close. The Emini will once again be down on the year. But, it is still in the 2 month trading range.
When there is a big gap, there is only a 20% chance of a trend from the open up or down that lasts all day. Typically, there is at least one reversal in the 1st hour. The bulls will try to create a double bottom or a wedge bottom. If there is an early rally, the bears will look for a wedge rally or double top near the EMA.
In either case, the early trading range reduces the chance of a big trend day. While there typically is a trend, it is usually not as strong as a trend that comes when there is not a huge gap.
EURUSD Forex triangle and nested head and shoulders bottom
The EURUSD daily Forex chart has a month-long head and shoulders bottom. The right shoulder is a smaller headed and shoulders bottom nested within the larger one. The weekly chart has a wedge bull flag (not shown) at support. This is good for the bulls.
However, the daily chart is still making lower highs and is therefore still in a bear channel. But, there are now the higher lows for the past month in addition to the lower highs. Therefore, the chart is in a triangle. That is a sign of a balanced market. There is a 50% chance of a successful breakout up or down. Furthermore, there is a 50% chance that the 1st breakout will fail.
Overnight EURUSD Forex trading
The EURUSD 5 minute Forex chart rallied 45 pips over the past 3 hours. In addition, it traded above yesterday’s high. That triggered a buy signal on the daily chart for the 2nd time in 3 days. The bulls want this to be the start of a rally to above the November high.
If they will succeed, they will start to create bull bars on the daily chart. Consequently, if they truly are taking control, they will buy 20 – 30 pip pullbacks and try to get most days to close near their highs. If they are successful, other bulls will buy as the market goes up.
The bears do not want to see a series of bull trend days on the daily chart. They therefore will sell every new intraday high. If there is a strong bull breakout, the bears will wait for a micro double top or a wedge top before selling. They need to create big bear days to regain control. If they do not begin to get bear days within the next few days, the odds will favor a rally to the November high.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
Today gapped down and sold off to below last month’s low and last week’s low. By going below last week’s low, this week is now an outside down week. It reversed up from a wedge bottom and parabolic wedge bottom below the November low and last week’s low. It rallied into the close and formed a good buy signal bar for tomorrow. With tomorrow’s unemployment report, tomorrow might gap up and form an island bottom. The report could create a big trend day up or down.
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.