Posted 7:09 a.m.
Today began with a limit order open just below yesterday’s high and last week’s low. The 2 day rally has been a bear flag. Coming into the day, the bulls wanted a bull breakout back above last week’s low and into the upper trading range. The bears wanted a reversal down from the top of a 3 day bear flag.
The bulls have broken back above last week’s low and have had 3 consecutive bull bodies. The Emini is Always In Long. However, the bodies are small, and there are prominent tails above bars. There was also a small tight trading range on the open. This makes this rally weak, and it is more likely a bull leg in either a weak bull trend or in a trading range. The 1st reversal down will probably be bought, but this could quickly become the high of the day. At the moment, there is uncertainty, which is a hallmark of a trading range, and the odds are that today will have a lot of trading range price action. Traders will be quick to take profits, betting that moves will not go far. They will also enter with limit orders, betting against small breakouts. Unless there is a strong breakout up or down, traders will continue to be cautious and create a lot of trading range price action.
Pre-Open Market Analysis
S&P 500 Emini: Day trading tip is to be ready for a bear rally
I wrote in my weekend blog that this week might trade down for a couple of days, but the odds favored a test up starting by the middle of the week. The Globex market is up 14 points with an hour to go before the day session opens. The January sell climax was so extreme that 2 legs up were likely. Although the rally that ended last week had two legs, it was in a tight channel. When that is the case, the two legs are usually part of a complex 1st leg up, and the selloff that follows usually fails to resume the bear trend. Instead, it is usually followed by a 2nd leg sideways to up. Today might be the start of that 2nd leg up.
If there is a 2nd leg up, the minimum target would be a measured move up based on the height of the 2 day trading range, which is around 1900. The next target is last week’s high, which was 2 ticks above a 50% retracement of the January selloff. There is still a 40% chance of a new all-time high before a significant break below the January low.
Unless the Emini breaks strongly above that 50% retracement at 1940, those who trade the markets for a living will see the trading range since the January low as a bear flag. The bulls see it as a higher low major trend reversal. Major trend reversals have about a 40% chance of leading to an actual reversal, and a 60% chance of leading to either a trading range or failing and being followed by a resumption of the bear trend.
The bulls had a chance to create a strong bull trend reversal candlestick on Monday and a strong entry bar yesterday, but failed both times. They may fail to get a gap up today, which would create a 2 day island bottom. This inability of the bulls to create signs of significant strength is consistent with the probability that any rally over the next couple of weeks is more likely part of a bear flag than the start of a bull trend reversal. However, there is a lot of room up to the 1940 top of the developing range for the bulls to have some very strong bull trend days.
Will today be a strong bull trend day? It is too early to tell, but the bears might give up short term and concede that a 2nd leg up on the daily chart is beginning to unfold. Those learning how to trade the markets should understand that even though a bounce is likely, the exact opposite can unfold. Day traders need to be open to anything at the start of the day. If there is a strong breakout up or down, traders should look to trade in its direction. Since the Emini has had a lot of 2 sided trading over the past 2 days, traders will be quick to take profits until there is a strong breakout up or down. The odds slightly favor the bulls, but the bulls need a breakout. Otherwise the 2 day trading range will continue, or the bears might get their breakout.
With the Fed Chair talking today, there might be a surprise breakout up or down at any point during her testimony. The bigger it is, the more likely it will lead to a measured move. If it is not big, or if it reverses within a couple of bars, it might lead to a measured move in the opposite direction.
Forex: Best trading strategies
The daily chart of the EURUSD has reached reasonable objectives in its 2nd leg up from the December bull trend reversal. It is at about a leg 1 = leg 2 measured move up and a measured up based on the height of the 2 month trading range, and it is testing the top of the December 22 sell climax day at 1.1350. Yesterday’s high was about 13 pips below that obvious target, and that might not be close enough. Many traders will not trust a selloff unless the rally 1st reaches or goes a little above the resistance, or unless there is a strong reversal down.
Yesterday’s high was a small 2nd leg up after the February 3 bull breakout. Traders see it as an uneven double top with that high. It is also a large low 2 sell setup, which is a big ABC rally in a yearlong trading range. The December 3 rally was the 1st leg up. It is also the 3rd push up, where the January 28 high is the 1st push up. This is a type of wedge rally.
Because the 2 week rally is in a tight bull channel, a reversal down from this wedge top is more likely to result in a trading range than a bear trend. All of this price action increases the chances that the bulls will begin to take profits and the bears will begin to sell for scalps. This increases the chances of a pullback and trading range soon. The 1st bear target is the the support at the top of the two month trading range around 1.100 or the lower, smaller trading range 20 pips lower.
The rally over the past 2 weeks has had consecutive bull trend bars, which is a sign of strength, but the bars have tails on the top, and 2 of the past 2 bars were bear trend candlestick bars. The rally is stalling near resistance. This more often happens when a rally is a bull leg in a trading range and less often if the rally is the start of a bull trend. Unless there is a strong breakout above the August 2 lower high at 1.1712, whatever rally that the bulls get is probably just a leg in a yearlong trading range, which means that it will probably be followed by a bear leg in the trading range.
There is no sign that the bear leg is about to begin, and it could start at any time. Since the rally over the past 2 weeks has been in a tight channel, the 1st reversal down will probably be bought, and the best that the bears can probably get over the next 2 weeks is a trading range, where the bottom is around the top of the 2 month trading range that ended last week.
Last week’s trading range on the 60 and 240 minute charts might be the final bull flag in the current leg up. It is a magnet, which could pull the EURUSD down to 1.1100 over the next few days. The selloff from yesterday’s high has not been strong and it therefore looks more like a bear leg in an early trading range that the start of a bear trend. On the 5 minute chart, the selloff since yesterday’s high has also lacked consecutive big bear trend bars. This is consistent with it being a bear leg in a trading range. This means that trading range price action is likely today. There might be a strong breakout up or down today during the Fed Chair’s testimony.
In the meantime, online day traders will scalp for 10 – 20 pips, and many will enter with limit orders, selling above highs and buying below lows. If there is a strong breakout up or down, they will switch to swing trading.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini was in a trading range day, but sold off at the end of the day after failing to hold back above last week’s trading range low.
The bulls formed the 3rd disappointing bar on the daily chart. However, the selloff today on the 60 minute chart was not strong. The odds are that tomorrow will have more trading range price action. Everyone is aware of the importance of the January low. The bears have been unable to break below it and the bulls have been unable to reverse up from it. The odds still slightly favor the bulls for the next week or so, but if the bears get their breakout, the Emini could fall far and fast.
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.
