Island bottom and possible island top below all time high
Updated 6:53 a.m.
The Emini gapped down and formed a 2 day island top after last week’s lower high major trend reversal. While the 1st 2 bars had good bear bodies and today could become a trend from the open bear trend, it is more likely going to stall soon.
The bulls want an opening reversal, and early low of the day, and then a rally to above Friday’s close. The gap is big enough and the context is good enough for the bears so that there is only a 25% chance that the gap will close today. The best the bulls probably will get is a swing up in a trading range. They bulls will probably need a trading range and then a major trend reversal before they can get a swing up.
The bears want a trend from the open bear trend day. Because the Emini is back into last week’s triangle, it will probably spend a lot of time going sideways again in this area. The Emini is Always In Short. Because it is back to support and there is uncertainty tonight, today will probably not be a strong bear trend day.
Since the initial selloff was strong, the bears will probably sell the 1st rally. However, they sometimes do not sell until the rally gets to the high and to the moving average. This means that the Emini will probably be sideways to down.
When there is a big gap down, the Emini often enters a trading range until it is closer to the moving average. The rally in the range often forms a double top with the high of the open. It also often forms a wedge bear flag near the moving average.
Pre-Open Market Analysis
The Emini sold off on Friday and closed the gap above Wednesday’s high. A gap down today would therefore create a 2 day island top. It does not matter that last week’s gap up is higher. Island tops and bottoms often have gaps at different levels.
The bulls see the gap closure as simple a test of support at the bottom of last week’s gap up and at the 60 minute moving average. While closing the gap weakens the bull case, the odds still favor a test up.
Lower high major trend reversal
When Friday traded below Thursday’s low, it triggered a lower high major trend reversal on the daily chart. Yet, Thursday was a weak sell signal bar and Friday was a disappointing entry bar. Also, Friday was the 1st break below a 9 day bull micro channel. The odds therefore are that the bears will need a 2nd entry short or a big bear bar before traders will believe that the trend is down.
As a result of the strong reversal up over the past 2 weeks, traders will probably buy this selloff, betting that it is a bull flag. The odd are that the reversal up last week will lead to a test of the all-time high,
Overnight Emini Globex session
Overnight, the Emini continued its pullback from Thursday’s rally. It will probably gap down today and form a 2 day island top after a 3 week island bottom.
While it is still above Thursday’s low, the pullback has been in a tight channel and therefore represents strong bears. Big up Thursday, Big Down since then means Big Confusion, and confusion is a hallmark of a trading range.
The Emini has been mostly sideways for the past 6 hours after last night’s sell climax. Since it is now testing the top of the September 15 – 21 triangle, the odds are against a strong selloff. Because the selloff was in a tight channel, the odds are against a strong rally today. Furthermore, the uncertainty of tonight’s debate also increases the chances of trading range price action today.
While a trend day can come at any time, a trading range day is more likely today. Yet, most of the trading range days over the past couple of months have have swing trades up and down.
Forex: Best trading strategies
The EURUSD 240 minute Forex chart got its 2nd leg up from the double bottom overnight. Yet, the chart is still in the middle of a 6 month trading range. The bears expect the 6 month trading range to continue. The bulls need a breakout above lower highs.
The EURUSD is at the apex of nested triangles on the daily chart. the reversal up from a double bottom last Wednesday was strong. The odds therefore favored a 2nd leg sideways to up. While Friday’s weak rally was a 2nd leg, it is more likely part of a trading range after the 1st leg up.
The rally on the 60 minute chart had many bars with prominent tails and many reversals. This means that it is probably a bull leg in a trading range after the 1st leg up ended on Thursday. This means the the EURUSD might have to test Friday’s low before it begins its 2nd leg up. A reversal up from a selloff down to Friday’s low would create a double bottom. Hence, it would increase the chances of an clear 2nd leg up.
Overnight EURUSD Forex sessions
Last week I said that the September 22 rally from the double bottom was strong enough to make it likely that bulls would buy the 1st selloff, create a higher low, and then have a 2nd leg up. They accomplished their goal overnight. Yet, the EURUSD Forex daily chart is in the middle of nested trading ranges for the past 18 months. Therefore, every rally and selloff is likely to reverse. Hence, the odds are that this one is near its end. As a result, a couple of legs sideways to down from this wedge rally is more likely than a gap above last week’s September 22 high and then a measured move up to above the lower highs.
Every trading range eventually breaks into a trend. Especially relevant is that 80% of the attempts fail. Trading ranges constantly have very strong legs that appear to be the start of a trend. Yet, it is easier to make money expecting them to reverse. Therefore, the 5 minute chart will probably stall here today and go sideways.
Furthermore, the uncertainty of tonight’s debate will also probably inhibit a continued rally. However, after the debate, there might then be a breakout up or down that could last several days.
Summary of today’s S&P Emini futures price action and what to expect tomorrow
The Emini gapped down and formed a 2 day island top. After a double top in the 1st hour, it sold off in a wedge bear channel. It was also a trending trading range day.
Because the Emini gapped down, it formed a 2 day island top on the daily chart. Friday also triggered a lower high major trend reversal, Because the daily chart had a 9 day bull micro channel, the odds are that the bears will need at least a micro double top. Yet, tonight’s debate could lead to a strong move up or down tomorrow, even without a high probability setup today. Traders need to be ready for anything tomorrow. The Emini is still deciding whether to first go to a new high and then have a 100 point selloff, or have the 100 point selloff now.
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.
