I have been saying for the past several days that a 2 legged sideways to up correction was likely on the 60-minute chart because of its wedge bottom, and on the daily chart because of its parabolic sell climax down to support. Yesterday's selloff after the FOMC report makes it likely that the 1st leg up has ended and the pullback before the start of the 2nd leg has begun. The January 19 and 22 highs were the 1st 2 pushes up in the wedge bear flag that triggered yesterday.
That wedge top probably will have a couple of legs down on the 60-minute chart. Once that pullback ends, the 2nd leg sideways to up from the wedge bottom (a bigger pattern) will probably begin. I have said that the January selloff was so extreme that the Emini would probably enter a trading range that will last 2 – 4 weeks, and that is still likely.
Less likely, the bear trend is so strong that it will resume after only a single leg up from the sell climax low. If so, yesterday’s selloff will be the breakout of a double top bear flag. Some computers will see January 13 as the 1st top. Others will use January 19. All computers see the January low as the neck line of the double top. The bears want a breakout below the neck line and then a measured move down, which would be around 100 points below the January low.
Again, as I said, it is more likely that the leg down that began yesterday will be a bear leg in a trading range and that it will be followed by at least one more test up. However, if the lower probability event (bear trend resumption) unfolds, traders who trade the markets for a living will sell. They will not hesitate, thinking that the selloff should not happen before there is a 2nd leg up. Traders learning how to trade the markets must learn to trade what is now in front of them. They must avoid being paralyzed by what was more likely 1 day or even 1 second earlier. Trade what is there, not what you think should be there.
Yesterday ended with a spike and a parabolic channel sell climax. It was the 4th day in a tight trading range and the 8th day in a bigger trading range. When the Emini is in a trading range, it usually has strong legs up and down, and they usually reverse abruptly. Since it is more likely that the daily chart is in a trading range, it is more likely that yesterday’s selloff will end up as one of those sharp tests down. The selloff was strong enough on the 60-minute chart to make it likely that the 1st reversal up will be sold before the 2nd leg up from last week’s low begins. Since the pattern is small (a tight trading range), the legs up and down can last only a bar or two.
If there is a 2nd leg down on the 60-minute chart over the next few days, it will probably set up a higher low and be followed by a test back up on the daily chart as that trading range continues to unfold. During this process, traders will BLSHS Buy Low, Sell High, Scalp. They know that the odds are that breakouts will fail at least for several more days, so they will take quick profits. This style of trading feeds into the process and makes more of a trading range likely.
Whenever there is a big sell climax that lasts 20 or more bars at the end of the day, there is a 50% chance of follow-through selling in the 1st 2 hours, and a 75% chance of a 2 hour, 2 legged sideways to up correction that also will begin in the 1st 2 hours. If there is no follow-through selling, the trading range can begin on the open. The hour long rally at the end of yesterday might be the start of the trading range. Bears see it as a wedge bear flag and will look for a bear breakout and follow-through selling today. Bulls will try for a bull breakout above the bear flag and then a measured move up. Day traders need to be ready for either, but they know that the odds of a higher low on the daily chart are greater than those of bear trend resumption.
The Emini is up 2 points with an hour to go before the day session begins. It was in a 30 point broad trading range over night.Even though it was in a trading range in the Globex session and an early trading range is likely today, the swing down after the FOMC report and the broad Globex range mean that there will probably be at least one good swing trade up or down today. Yesterday’s sell climax make a trading range likely, which would have at least 2 swings.