Emini double top at 2200 resistance
Pre-Open Market Analysis
After Monday’s sell climax, yesterday went sideways for the 1st half of the day. The bear trend resumed in the middle of the day. The bulls reversed the 2 day sell climax at the end of the day and prevented a breakout below the August range.
This reduced the chances that today will be another bear day. The selloff has been strong enough to make a trading range today more likely for the 1st couple of hours than a bull trend.
Tight Trading Range Double Top
While most reversals in a tight trading range have a low probability of success, this is one exception. July is a credible Final Bull Flag. Because it is, the current Double Top of the past 2 weeks has a 40% chance of leading to a TBTL correction (Ten Bars, Two Legs) on the daily chart. If the correction comes, the 2nd leg down is often unusually big and fast.
Traders need to be ready for a bear breakout staring within a few days. That would be the 1st leg down. Then, there is usually a bounce that can last 5 – 10 bars. Finally, there is a brief, but big collapse. While there is a 60% chance of at least one more new high, 40% is too big to ignore. Be ready.
Momentum bulls might give up
While the Emini has not fallen far, the context is important. The daily chart has a double top over the past 2 weeks just below major resistance. Furthermore, the Emini has not had a significant pullback since the June 27 low.
Therefore many bulls have stops that are uncomfortably far below. These bulls will not let those stops get hit, and many are taking partial profits.
If there is enough profit taking, it will scare the momentum bulls. I wrote about them yesterday. Momentum bulls did a lot of the buying over the past 2 months. They bought simply because the market was going up.
They did not care that it was expensive. By expensive, I mean that the daily chart is far above its moving averages. Therefore, bulls buying here are paying far above the average price.
How big a pullback?
When they decide that the Emini is not going higher and may even go lower, what will they do? For them, their premise would no longer be valid. If a bull is long and he decides that his reason to be long no longer exists, he sells.
It would not take much for the momentum bulls to suddenly all sell out of their longs. One or 2 closes below the August or July trading ranges would probably be enough.
As a result of these weak bulls all rushing to sell, the Emini could sell off rapidly. Two percent corrections are common. When the buying has been as climactic as this has been, there is often a 5% correction.
That is why I have been saying that there is a 60% chance of a 50 – 100 point correction before the market goes much above the 2220 resistance.
A 5% correction would fall below the 2100 top of the 2 year trading range. The pullback could reach the 2065.75 July 6 low. That was the 1st pullback after the strong reversal up. Hence it is a magnet.
The bull case
While the Emini sold off for 2 days, it is still in the August tight trading range. Unless it closes far below, the odds still favor a new high and a test of the 2200 targets. Yet, the selling was strong enough to make it almost as likely that the bears will win. They just need a little more selling.
This is always the case at the bottom or top of a trading range. The breakout attempt always looks strong enough to make traders believe it will succeed. Yet, 80% of attempts fail. Until there is a breakout, there is no breakout. While the context and the past 2 days have been good for the bears, the bulls still have the edge.
Emini Globex session
While the Emini is down 4 points in the Globex session, it will probably be sideways today. The GDP comes out tomorrow and Yellen speaks. If there is a good report and she surprises everyone with her comments, that could lead to the start of a correction.
Yet, the odds still favor one more new high, and the news could easily create a reversal up. Today will probably be quiet, but tomorrow could be a trend day.