Emini profit taking and 5% correction after strong January barometer?
Updated 6:38 a.m.
The Emini opened with a big gap down to around the bottom of the 6 day range. The 1st bar was a strong bull bar. It therefore is a possible low of the day. When the Emini opens at support in a strong bull trend and reverses up, it reduces the chances of an early bear trend. Usually, the Emini will go sideways to up to the moving average. The bears will try to form a wedge bear flag or double top there. The bulls will try to get a series of strong bull bars breaking strongly above the average.
Since the day opened far below the average, but at support, and with a strong bull bar, the odds are that it will trade sideways to up for an hour until it gets near the average. If the rally is very strong, the day will be a reversal day and a bull trend day. If the rally is a wedge, the odds would favor sideways to down for the rest of the day.
Pre-Open market analysis
Traders hope that January is a barometer for the year. However, this is an unreliable indicator. A more important indicator is the strong bull trend in 2017. The odds favor higher prices, even if there is a 10 – 20% correction in 2018. More likely, the biggest correction will be 5 – 10%.
There are 2 days left to the month and the month has been exceptionally strong. Consequently, the bulls might take some profits. If so, today and tomorrow might be sideways to down. Yesterday was a bear inside day in a parabolic wedge top. Furthermore, the buy climaxes on the daily, weekly, and monthly charts have never been this extreme. Therefore, the odds favor a 5% correction beginning within the next few weeks. With the January rally being so extreme, the environment is good for a pullback.
Can this rally continue up to 3,000 without a 5% pullback? Of course. However, it is already more overbought than any other time in the history of the stock market. That increases the odds of a 5% pullback in February or March. Yet, the bull trend is so strong that the bulls will buy the reversal down even if it is dramatic. For example, if there is a 100 point selloff over 2 – 3 days, the bulls will buy. This is because they know the odds are that the selloff will be followed by a new high.
Overnight Emini Globex trading
The Emini is down 14 points in the Globex session. It will therefore probably open below yesterday’s low. Since yesterday is a sell signal bar, the open will trigger the sell signal. However, the bull trend is exceptionally strong on the daily, weekly, and monthly charts. Therefore, the bulls will be eager to buy a selloff, even if it is deep and fast, like 100 points over a week.
Because there is an increased chance of a quick pullback, the bears will look for signs of a bear trend day, and then swing trade at least part of their short trades.
The bulls know that no matter how strong any selloff is, there are buyers below. This increases the odds of sharp reversals up from even strong selloffs. However, if these strong rallies start to form lower highs, they will begin to believe that a 5% correction is unfolding. They will then take profits on rallies and only look to buy reversals up from selloffs.
Support here and down to 2750
Even if the Emini opens 10 points below yesterday’s low, it would still be at the bottom of a 6 day tight trading range. Hence, it would be at support. The bulls will therefore look for a rally up from this level.
The bears need a strong break below 2825 before the bulls will believe that the selloff will test the next support at 2769.25, which is the January 16 major higher low. That is also around a 50% pullback from the January rally. That would only be a 3.7% correction. A 5% correction is likely in the 1st several months this year. If the 5% pullback has begun, 2750 is 5% down from the high.
Yesterday’s setups
Here are several reasonable stop entry setups from yesterday. I sometimes also show limit order entries and entries on the close of bars.
EURUSD Forex market trading strategies
The EURUSD daily Forex chart is in a buy climax at the 1.2500 Big Round Number. The odds are that it will enter a trading range for at least 2 – 4 weeks.
The EURUSD daily Forex chart is in a strong bull trend. The 3 day pullback is therefore a bull flag (High 1 bull flag). Yet, yesterday was a big bear bar. Hence, it is a low probability buy setup. Furthermore, there is a parabolic wedge at the 1.2500 Big Round number. In addition, there was a micro double top last week. As a result, the odds are that there will be sellers above yesterday’s high and above the top of the parabolic wedge (last week’s high).
While the bulls hope for a strong breakout above last week’s high, it is more likely that the strong bull trend is transitioning into a trading range. The sideways to down trading will probably have at least 2 legs sideways to down. Also, it will probably last at least a couple of weeks. Finally, the selloff will probably test support below. Typically, the 1st target is the bottom of the most recent buy climax. Hence, there is a magnet a the January 18 low.
Overnight EURUSD Forex trading
The EURUSD 5 minute Forex chart rallied 100 pips overnight from a double bottom and a 3 day High 2 bull flag. The rally is strong enough so that the bulls will buy the 1st pullback. Yet, because of the buy climax on the daily chart, the odds favor sideways to down trading over the next couple of weeks. Consequently, bears will look to sell the rally and sell above last week’s high.
Since the overnight rally is in a tight bull channel, the best the bears can probably get over the next few hours is a trading range. Yet, the bears will look to swing trade at least part of their shorts if there is sell setup on the 60 – 240 minute chart this week.
The bulls will switch to only buying pullbacks because they know the odds are beginning to favor a trading range on the daily chart. Moreover, they will be quicker to take profits on rallies.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini had a big gap down, but then a reversal up from the bottom of the 6 day trading range. It was a trading range day.
While today gapped down after a parabolic wedge top on the daily chart, it is the 1st break below a tight channel. Consequently, the reversal will probably be minor, even if the rally does not resume for a couple of weeks. The bulls want a gap up tomorrow. That would create a one day island bottom. However, the 2 day selloff is big enough to make a trading range likely for a couple of weeks.
The bears want big bear bars. Yesterday was a doji bar on the daily chart, and therefore a weak start for the bears. While the odds favor a 100 point, 5% pullback over the next couple of months, the selloff will probably not be strong. Furthermore, the bulls will buy it and this will lead to a new high.
On the 5 minute chart, the Emini was in a trading range after a selloff. It is therefore in Breakout Mode. The bears want trend resumption down tomorrow, while the bulls want trend reversal up.
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.
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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.
