Although the Emini had a huge reversal up from above the January 27 higher low and bottom of the trading range, the day ended up closing near its open. It was a big doji bar, which is a one day trading range, and it formed in the middle of the trading range of the past month. It was more trading range price action than a strong bull reversal candlestick pattern. Because the rally was unusual, it was climactic and therefore unsustainable. That means that, although there is a 50% chance of some follow-through buying in the first 2 hours, there is also a 75% chance of at least 2 hours of sideways to down trading that starts in the 1st 2 hours. The Emini is down 15 points 40 minutes before the day session opens so that correction has already begun.
The bears were disappointed by the reversal up and the bulls will be disappointed by the gap down. Disappointment is one of the hallmarks of a trading range, and that is what the price action is telling us to expect. The size of the swings has been great for day traders, but frustrating for swing traders on the daily chart. More trading range price action is likely.
On the 60-minute chart, the bears see the rally as a right shoulder in a head and shoulders top bear flag. The bulls see it as a double bottom with last week’s low. Those who trade the market for a living see it as a bull leg within a trading range and have no expectation of follow-through buying. They will trade whatever happens today, knowing that within a trading range, the odds for the bulls are about the same for the bears, no matter what happened yesterday.
The foundation of the bull market is crumbling on the daily chart. December 14 should not have dipped below the September 17 high, January 4 should not have dipped below December 14, and the January low should not have dipped below the August 2015 low. Bull markets do not typically do this. This happens in trading ranges and in early bear trends. The daily chart is clearly in a trading range, and it is also in an early bear trend. The odds are still better than 50% that the 3 week rally is a bear flag, and just a pullback from the breakout below the August 2015 low. This means that the odds are better than 50% that the bear swing will have another leg down. If it falls below the January low, it probably will quickly fall to support on the monthly chart. The next level is the bull trend line around 1700, and there is other support around 1600 and 1500.
For over a year, I have written repeatedly about how unusual the monthly chart had been. It had not touched the monthly moving average for 38 months. This has happened with the cash index twice in over 50 years. It was followed by 22% and 36% corrections. This makes me suspect that the current selloff has more to go.
Because the selloff on the daily chart last month was so dramatic, the bear might wait for more than a month and for a test up to higher resistance before they aggressively sell again. Even though the odds favor lower prices over the next several months, they probably favor at least slightly higher prices over the next couple of weeks.