Will the stock market bears get a black swan event?
Pre-Open market analysis
The Emini has been in a broad bull channel on the daily chart for 3 weeks. Because Friday was a bull bar after a pullback, it is a buy signal bar for today. Yet, it was a doji bar that followed 3 bear bars. Since that is good selling pressure, it increases the chances that there might be enough sellers above Friday’s high to make the Emini go sideways for a couple of days.
Last week was a sell signal bar on the weekly chart. Since the weekly chart is so extremely overbought, the odds favor a 100 point pullback beginning within weeks. If this week trades below last week’s low, it would trigger the weekly sell signal.
Yet, unless there is a big bear entry bar on the weekly chart, the odds are that the selloff will be a brief bull flag. Most attempts to reverse trends fail. This would likely lead to at least a little more up on the weekly chart.
Buy climax means increased risk of Black Swan event
The fundamentals strong, but the weekly chart is extremely overbought. The bears therefore are hoping for a Black Swan event. By definition, Black Swan events are rare. However, because the weekly buy climax is so extreme and likely to reverse soon, there is an increased chance of a surprise over the next few weeks.
The bulls want the trend up on the daily chart to continue. The next resistance is the 2500 big round number. While the weekly chart is extremely overbought, there is no sign of a top yet. This ongoing buy climax makes the Emini more susceptible to news events. The current news is about the Senate’s replacement of Obamacare and the hopes for tax reform. When there is a buy climax, even a minor story can be a catalyst for a big reversal down. However, climaxes can go a long way before they end, and there is no sign of a top yet. The odds favor higher prices, at least for a few days.
Overnight Emini Globex trading
The Emini is up 6 points in the Globex market. This is the end of the 2nd quarter and the week before the 4th of July. Both increase the odds of higher prices over the next week. If the Emini opens here, it will gap up. Since it is in a bull trend on the daily chart, this would be a buy entry on that chart.
Yet, the past 2 days were dojis. Furthermore, the Emini has been mostly sideways with many dojis over the past month. Finally, it has been in a 5 day bear micro channel. These factors reduce the chances of a big trend day today. The bears hope that any rally this week reverses down around the all-time high from last week. For example, they want either a lower high or higher high major trend reversal.
When there is a gap open, there is an increased chance of a trend day up or down. While the odds slightly favor the bulls, the Emini has been mostly sideways over the past month. Hence, the most likely outcome today is another day with mostly trading range trading.
However, traders will pay attention to the price action over the 1st hour or two. If there is a series of trend bars or gaps up or down, the odds of a strong trend day will go up. Therefore, traders will swing trade part or all of their positions.
Friday’s setups
Here are several reasonable stop entry setups from yesterday.