Posted 6:45 a.m.
The Emini broke above the top of the 5 day bull channel on the open. This is a wedge bear flag. It then reversed down, as expected. The bears are hoping for a bear trend day. The bulls would like the selloff to be a bear leg in a trading range. If that happens, they will then try to create an opening reversal and then a new high.
At the moment, the Emini is always in short. The selloff is big enough to make a bull trend day unlikely. However, the day still could end up going sideways within yesterday’s trading range. Until there is a strong reversal by the bulls, bears will continue to swing trade and they will sell rallies. They will hope that today becomes a bear trend day. The bulls initially will only consider scalps until they create a credible bottom. Since the Emini has had so much trading range price action over the past few weeks, there probably will be a lot of trading range trading today, despite the strong initial selling.
My thoughts before the open: Bull breakout of a wedge bear flag
The Emini has been in a broad bull channel for 5 days after a strong selloff. This bull channel is a wedge bear flag. Today’s open is an attempt to create a bull breakout of a wedge bear flag. The bulls want a strong breakout and then a measured move up to the 2060 lower high. The bears want this breakout to fail and create a larger wedge bear flag. They then want a breakout below the January double bottom and a measured move down. Most of the time, a bull channel ultimately breaks to the downside and forms a trading range. Sometimes it breaks above the channel first and then reverses back down. Less often, there is a successful bull breakout above the channel and a measured move up.
That 2060 lower high is an important magnet. As long as the rallies stay at or below it, the bears can claim that they still own the market. If the bulls can break above it, the bear swing of the last month will have ended and traders will see the selloff as just a bear leg in a 3 month trading range. Because it is such a critical price, the Emini might get vacuumed up there, and then it would decided between a double top bear flag and a bull breakout above a lower high.
Summary of today’s price action and what to expect tomorrow
The big selloff on the open greatly reduced the chances of a bull trend day. The market did not care and formed a trend resumption bull trend day.
After selling off 18 points on the open, the chance of a bull trend day was very small. There has only been one other bull trend day in the past year with a tail below that was this big. The bulls got trend resumption after a 3 hour trading range and tested the 2061 lower high from 2 weeks ago. The bears want a double top, and the bulls want a breakout. Today’s strong trend makes the bull case stronger. However, the Emini has been in a trading range for several months and today’s rally might end up as simply a buy vacuum test of resistance. Until there is a breakout with follow-through, traders will continue to assume that breakouts up and down will fail.
Today ended with a small tight trading range, which is a bull flag. However, it is testing the lower high from 2 weeks ago, and will probably pull back. Most breakouts fail, so this one will probably disappoint the bulls and there will probably be more trading range price action. Eventually there will be a breakout, but any one attempt is likely to fail, so this one will probably fail.
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.
