Pre-Open Market Analysis
The Emini reversed down from another new all-time high yesterday. Yet it reversed back up and became a trading range day. Because the bull channel over the past 4 weeks now has 3 pushes up, it is a wedge top. Since it is above the March 1 high, it is a wedge higher high major trend reversal. Yesterday’s bear body therefore made yesterday a sell signal bar.
However, since the bull trend is strong, most reversals fail. Furthermore, major tops have a 40% chance of leading to a swing down. In addition, there is another way to draw the wedge channel where the top of the channel is about 5 – 10 points above yesterday’s high. Also, Amazon.com (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) are in strong rallies and within 40 points of the 1,000 Big Round Number. The market might be waiting for one or both to hit 1,000 before correcting.
Hence, while the weekly chart has an extreme buy climax and a 1 – 2 month pullback is likely soon, the odds that yesterday is the top are less than 40%. Therefore, bears wanting a higher probability of a swing down need to wait for one or more big bear bars, or 3 or more consecutive small bear bars. This can happen anytime within the next couple of weeks.
Overnight Emini
The Emini is down 14 points in the Globex market. It will therefore probably gap down. Hence, the gap will form a 4-week island top with the April 25 gap up and a 2 day island top with Monday’s gap up. Island tops and gaps are common in trading ranges and usually do not have predictive value. However, this gap down is coming after an extreme buy climax on the weekly chart. For the past several weeks, I have been saying that there was a 70% chance of a 100-point correction beginning within a few weeks. Today’s gap down therefore has an increased chance to be the start of a swing down on the daily chart. Traders should look for signs of a bear trend day.
In addition, if today is even just a weak bear trend day, traders should be ready for a surprisingly strong selloff in the last hour. If this is the start of a swing down on the daily chart, there will be an increased chance of late selloffs every day. This is more common in bear trends. Hence, traders need to be prepared for a possible evolution of the trading range trading of the past 2 months into bear trend trading.
The bigger the gap, the more likely it will have follow-through over the following days. If today is a big bear trend day closing on its low, the odds of follow-through selling also will be greater. Since the Emini has been sideways for 2 months, the odds are that the bears will be disappointed about something over the next few days. For example, today might be a bull doji day instead of a big bear trend day.
Bull Case Less
Finally, the daily and weekly charts are in strong bull trends. Consequently, many traders will buy every reversal down. Hence, it is possible that the bulls buy the gap down and today could be a bull trend day that closes above yesterday’s low. Consequently, if a strong rally begins, traders should be prepared to swing trade from the long side. Yet, because of the weekly buy climax, this is less likely today.