The Emini tested down to 1865 five times over the past 2 weeks on the daily chart. It is currently down 24 points in the Globex market with less than an hour to go before the open of the NYSE. It will probably gap below this support level on the open. The next support is the January low of 1806.24. The open with give online day traders a chance to learn how to trade a gap down in a trading range
The January reversal up from that level was a test of the bottom of the 2-year range, and it is the neck line of a 2-year head and shoulders top. The bears want a breakout below and then a measured move down to the 1500 area. While the odds of a break below 1800 are about 60%, the chance of a test down to 1500 is only about 30% at the moment.
The January sell climax was extreme. This made it likely that the bounce would have at least 2 legs up and last at least 10 bars on the daily chart. It lasted 9 bars, but the 2 legs up were in a tight trading range. That is more likely just a complex 1st leg up, which means that the selloff from the 50% retracement last week around 1940 might still be only the pullback from the 1st leg up. If so, today’s selloff would then reverse up today or tomorrow and begin the 2nd leg up.
The bulls need to hold above the January 20 bottom of the bull leg, and then begin a 2nd leg up. If the bulls succeed in reversing the Emini up today or tomorrow, they will see this low as a double bottom with the January 20 low. They then would want a breakout above last week’s 1940 high, which is the neck line of the double bottom. A measured move up from there would be near the all-time high. At the moment, the bulls have about a 30% chance of accomplishing all of this, and a 70% chance of either creating another bounce in a trading range or bear channel, or simply collapsing below the January low.
Those who trade the markets for a living will see today’s gap down as a test of the January low. They will be open to either a reversal up within the next few days or a big bear breakout and fast move down. Since the Emini is still within the January trading range, the odds are about the same for both outcomes. The bears have a slightly higher probability, given the context and the bear momentum, but until there is a bear breakout, there is no breakout, and the odds of the bear breakout on any particular leg down are still only slightly more than 50%.
Whenever there is a big gap down, there is an increased chance of a trend day in either direction. Most often, the market has to get closer to the moving average before it decides on its direction. This means that a trading range for the 1st 2 hours is more likely than a trend from the open bull or bear trend.
If there are consecutive big bear trend bars, bears will sell, but will be quick to get out on any reversal up. If there is an early buy signal bar or an early bull reversal, bull swill buy. They will be quick to take profit if the rally stalls. With both bulls and bears being quick to take profits, the odds of an early trading range that goes sideways to the moving average go up. That makes the early trading range, whether or not there is a brief breakout up or down on the open, the most likely price action for the 1st 1 – 2 hours.