The Emini had a pullback yesterday from last week’s rally. Four of the past 5 days were dojis. This is trading range behavior and it is just below the resistance of the November high. For several weeks, I have been saying that a trading range on the daily chart was more likely than a continued rally above the all-time high, and this is what is unfolding. The Emini sold off last night on the news from Turkey and Russia. This will give day traders a chance to earn how to trade a catalyst. However, the Emini had already stalled, and if you read my weekend blog, you will see that I thought we would pull back this week, and that the Emini might be forming a trading range between 2000 and 2100. There is always a news event happening every minute of every day. It is convenient to claim that the news caused the event. However, the 15 minute chart yesterday had 15 consecutive bars without a bull body, so the selloff began before the news. People are naturally drawn to easily understandable explanations. Yes, the news caused the selloff, but I did not anticipate this news, yet said that a pullback was coming. This means that there are additional forces at work.
All markets constantly probe up and down to find the best price for bulls and bears to trade, and they do it on all time frames. That price changes constantly with every little piece of information from every company and every government and every world event. This makes the perfect price impossible to know. Because the fairest price can never be known, the market needs an alternative.
The alternative is that it constantly probes up and down to find a range that will encourage both bulls and bears to trade. Although the exact perfect price cannot be known, the market is very good at knowing how high is too high and how low is too low. The market usually goes one way until traders decide that it is too far. It then probes in the opposite direction. Sometimes the range of fair prices can be very broad, like it has been for the past year. Other times, it is very tight, like it was during the 1st 7 months of the year. The 20 point last night was a probe down on the 5-minute chart after last week’s probe up. For the past year, the market has consistently decided that the 2100 area is too high. There are too many bears eager to sell there and not enough bulls willing to buy. The result is that the Emini keeps turning down.
At some point, one of two things will happen. The bulls will conclude that there are simply not enough bulls willing to buy around 2100, and that they should instead sell out of their longs and wait to see how far down the bears are willing to sell. Once they sense that the market has gone down too far, they will buy again. The 1800 area has been too far down for over a year, and it might be again if the Emini sells back down there. It is too early to know.
The other thing that can happen at resistance is that the bulls continue to buy and the bears see that they are becoming unable to drive the market down very far. If enough bears decide that there are not enough sellers around 2100, the Emini will have to go higher to find more sellers to take the other side of the trade from the buyers. The result would be a breakout above the 2100 area. The bears would wait to see if the bulls are quick to take profits or are eager to buy above the range. If there is a strong breakout, the bears will wait until there are signs that the rally is getting exhausted and that it has gone too far. At that point, they will begin to sell again.
The Globex market is currently down 14 points. The bear breakout on the 60-minute chart has already led to about a measured move down from the two day trading range. The 240-minute chart formed a wedge rally over the past week. A TBTL Ten Bar Two Leg correction was a reasonable goal. This overnight selloff has met that goal. Traders learning how to trade the markets should realize that the Emini could easily continue down to last week’s low and then to the bottom of the yearlong trading range. Those who trade the markets for a living know that once the minimum pullback goal has been reached, bears might take profits and bulls might begin to buy again. If the Emini reverses up, bulls will look for a swing trade, and then a test of the November and all-time highs.
Next Monday is the last day of the month. What happens until then determines the appearance of the monthly chart. So far, this month has been a doji candlestick pattern. This is neutral, and it is bad follow-through buying after the October rally.
Last night’s selloff was followed by about a 50% pullback. The Emini has since sold off again to near the overnight low. The selloff was strong enough to lead to a test of last week’s low around 2000 over the next week or two. However, the bulls will try to create a double bottom on the 5-minute Globex chart. Day traders will watch the open. There will probably be a big gap down. This increases the chances of a trend day up or down. When there is a big gap, there is about a 50% chance of a trend up or down on the open. The Emini also has a 50% chance of limited move over the 1st hour or so until it gets closer to the moving average. At that point, it then decides between a reversal up and trend resumption down.