At the end of yesterday, there was a 60% chance of two things happening over the next few days. The Emini was likely to trade above yesterday’s high and below yesterday’s low. Since the Emini has gone 6 days without a pullback, the rally is strong. The first pullback below the low of the prior day will be bought, but the pullback might last 1 – 3 days. Because the rally was climactic and stopped at resistance, and the past 2 days were small and therefore represent exhaustion, the odds are that a breakout above their highs will be sold. The first breakout attempt will likely fail. A High 1 pullback (a 1 – 3 day bull flag) at resistance and after a buy climax is a low probability buy setup, which means that there are usually more sellers than buys above the buy signal bar.
With the Globex session down 10 points, the Emini will probably trade below yesterday’s low. This would create the 1st pullback in 7 days, and it probably will be bought before the end of the week. This usually means that one of the days will trade above the high of the prior day. For example, if today’s high is below yesterday’s high and today’s low is below yesterday’s low, today will be a buy signal bar. It will attract more buyers tomorrow if today closes above its open and near its high. However,the odds are that if tomorrow trades above today’s high, the rally will last only a day or two and the Emini will try to pull back again. This would create a micro double top, and it could lead to a deeper pullback. That deeper pullback, even if it lasts a couple of weeks, will also be bought. At that point, the bears would have enough bars for a credible major trend reversal, and they might then take control of the market, and the August bear trend might then have a 2nd leg down to below last October’s low.
The bulls hope that the deeper pullback will attract enough buying to recover the momentum of the past few weeks and propel the market strongly above the September high for a test of the 2030 – 2050 bottom of the 7 month trading range and then the all-time high. The rally has been strong enough to raise the probability for the bull case from 40% to 50%. That means that there is still a 50% chance that this rally is a trap and just a double top with the September high, even if it goes 50 points above that high. If it turned down from that level, it would be an expanding triangle, which is a type of major trend reversal.
If the Emini trades down for 1 – 3 days, the downside targets are higher lows in the rally. The levels are around 2000, 1971, 19060, and possibly 1938, which is the breakout point above the October 1 and 2 double top. If the Emini falls that far, it will probably have to have a micro double top first, which means that the buyers this week would take the market back up to the September high at some point over the next several days, and the bulls would have to fail there a 2nd time.
Will the Emini have a strong bear trend day today? It is more likely that any bear trend will be weak, like a broad channel or a trending trading range day. This means that they might then be a rally late in the day, which would turn today into a better buy signal bar for tomorrow. If instead there is a strong bear breakout with strong follow-through, today could be a strong bear trend day.
Since there are probably buyers below yesterday’s low, they might come in early today and lead to a bull trend day from below yesterday’s low. With the range yesterday as small as it was, today could easily be an outside up day.
No matter what happens, the odds are that the first pullback will last only 1 – 3 days and be bought, and traders learning how to trade the markets should understand that the next leg up will be brief and be sold.
By the way, even though the Emini rallies slightly above the September high, the cash index did not. Those who trade the markets for a living see this as a minor sign of weakness for the bulls and strength for the bears.