I wrote in my weekend blog that this week might trade down for a couple of days, but the odds favored a test up starting by the middle of the week. The Globex market is up 14 points with an hour to go before the day session opens. The January sell climax was so extreme that 2 legs up were likely. Although the rally that ended last week had two legs, it was in a tight channel. When that is the case, the two legs are usually part of a complex 1st leg up, and the selloff that follows usually fails to resume the bear trend. Instead, it is usually followed by a 2nd leg sideways to up. Today might be the start of that 2nd leg up.
If there is a 2nd leg up, the minimum target would be a measured move up based on the height of the 2-day trading range, which is around 1900. The next target is last week’s high, which was 2 ticks above a 50% retracement of the January selloff. There is still a 40% chance of a new all-time high before a significant break below the January low.
Unless the Emini breaks strongly above that 50% retracement at 1940, those who trade the markets for a living will see the trading range since the January low as a bear flag. The bulls see it as a higher low major trend reversal. Major trend reversals have about a 40% chance of leading to an actual reversal, and a 60% chance of leading to either a trading range or failing and being followed by a resumption of the bear trend.
The bulls had a chance to create a strong bull trend reversal candlestick on Monday and a strong entry bar yesterday, but failed both times. They may fail to get a gap up today, which would create a 2-day island bottom. This inability of the bulls to create signs of significant strength is consistent with the probability that any rally over the next couple of weeks is more likely part of a bear flag than the start of a bull trend reversal. However, there is a lot of room up to the 1940 top of the developing range for the bulls to have some very strong bull trend days.
Will today be a strong bull trend day? It is too early to tell, but the bears might give up short term and concede that a 2nd leg up on the daily chart is beginning to unfold. Those learning how to trade the markets should understand that even though a bounce is likely, the exact opposite can unfold. Day traders need to be open to anything at the start of the day. If there is a strong breakout up or down, traders should look to trade in its direction. Since the Emini has had a lot of 2 sided trading over the past 2 days, traders will be quick to take profits until there is a strong breakout up or down. The odds slightly favor the bulls, but the bulls need a breakout. Otherwise the 2-day trading range will continue, or the bears might get their breakout.
With the Fed Chair talking today, there might be a surprise breakout up or down at any point during her testimony. The bigger it is, the more likely it will lead to a measured move. If it is not big, or if it reverses within a couple of bars, it might lead to a measured move in the opposite direction.