The Emini finished yesterday with a strong reversal up from its breakout below the 2-week trading range. Bulls see yesterday as a buy signal bar for a higher low major trend reversal, and they expect a 2nd leg up from the January low. The bears see it as a continuation down from a double top bear flag on the daily chart and expect a break below the January low and then a test of monthly support. Both sides need follow-through. Without it, the trading range is likely to continue.
On the 60-minute chart, the selloff from last week’s right shoulder of a head a shoulders top was in a tight enough channel that the bulls might need a double bottom before they can get a bounce. The Globex market is down 22 points with an hour to go before the NYSE opens. If the bulls can get another reversal up today or tomorrow, that could create a double bottom that could result in at least a measured move up. There is a 60% chance that the Emini will fall below the January low within the next few weeks, whether or not there is a bounce. Yesterday was strong enough to make a bounce likely, but today’s big gap down will erase much of what the bulls did and make the Emini neutral again for the next few days.
I am finally seeing technicians on TV pointing to the support levels that I have been talking about for the past year. They are also beginning to talk about a much bigger correction, like a test down to the breakout point on the monthly chart, which is something that I have repeatedly mentioned for more than a year as a real possibility. It is too early to know if the Emini will reach those levels, but now that traders are considering them, it increases the chances that the Emini could have several big moves down over the next several months as it gets vacuumed down quickly to each lower support level. The bears need a break below the January low. Until they get it, the chance of the Emini testing the monthly breakout point around 1500 is only 30%.
Yesterday ended with a buy climax. The bulls had a chance of a gap up today, and then another test of the 1940 50% pullback level. Instead, today will gap down. When there is a buy climax at the end of the day, there is a 50% chance of follow-through buying in the 1st 1 – 2 hours on the next day, and a 75% chance of at least a 2 hour sideways-to-down move that begins within the 1st 2 hours. Yesterday ended with a big move up and today will begin with a big move down. Today could be a reversal and start of a bear trend, but more likely will be the start of a trading range.
Yesterday gapped down, which was a big move down. It reversed up big, and today will gap down big. Repeated big reversals increase the chances of a trading range on the 60-minute chart, which means it might go sideways for another day or two. The legs are big enough for swing trades up and down, so online day traders should look for candlestick patterns to buy near the bottom of the range and sell near the top.
There is a potential pain trade on the daily chart. If today sells off strongly, it could be the start of the breakout below the January low, and it could move down much faster and relentlessly than what traders think is reasonable.