Bull flag candlestick pattern coming soon
S&P 500 Emini: Pre-Open Market Analysis
The Emini has not had more than a brief pullback in the current 160-point rally. Overbought markets can become much more overbought than what beginners think is possible. Yet, they usually have pullbacks along the way. The daily chart of the bond market at the end of last week is an example.
Wide stops create pullbacks
Theoretically, the stop for the bulls is below the bottom of the most recent bull leg. That is the July 6 low of 2065.75 and it is about 100 points below. An institution needs to control risk. Once a stop is very far below, the risk begins to become unacceptable. The institution needs to reduce its risk. It can by puts or it can hedge with pairs trades. Most of all, it reduces its position size.
If many institutions begin to take partial profits, the market begins to pull back. They then wait to see if the bears can create a deep pullback. If the bears cannot, the institutions buy the pullback and their buying creates another leg up. They then put raise their stops to below that new bull leg and therefore have less risk.
Wedge top on 60-minute chart
There is no obvious resistance on the daily and weekly charts here. This is the top of a 60-minute wedge bull channel, using the July 1 and 12 highs. Because the channel is tight, any reversal down will probably be minor.
As a result of the tight channel lasting more than 40 bars, it is extreme and therefore climactic. Hence, it increases the chances of a sharp reversal. However, the risk is small. Institutions will probably reduce their positions within the next few days, and this will probably create a 20 – 40 point pullback that will last at least a couple of days. However, bulls will probably buy the pullback. The bull flag would then be followed by another leg up, which would be at least a one bar.
Globex market
The Emini is up 16 points in the Globex market. As a result, it will probably have a big gap up on the open. Whenever there is a big gap up, there is an increased probability of a trend day in either direction. The Emini had a buy climax overnight and has been sideways for 3 hours. The bulls want trend resumption up and the bears want trend reversal down. The 3rd possibility is that today is mostly a small trading range day, like the past 3 days. Day traders will watch the 1st several bars for clues to what the day will be.