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E-Mini Could Be Falling Into A Bear Trap

Published 11/29/2021, 10:01 AM
Updated 07/09/2023, 06:31 AM

On Friday, E-mini broke below the Nov. 10 low, which is the neckline of the Nov. 5/Nov. 22 double top. E-mini may form a monthly chart bear bar for November. 

While Friday closed well below that support, there was a conspicuous tail below. The bears will need strong follow-through early this week before traders will conclude that this is the start of a move down to the October low. The selloff was strong enough for traders to expect at least a small second leg sideways to down.

E-mini will probably dip below the Sept. 2 high before the bulls can get a new high. That was the breakout point for the October rally, and with all of the trading range trading in August and September, a strong selloff should continue at least to a little below the breakout point. That would also be about a 50% pullback from the rally up from the Oct. 4 low.

The bears want a measured move down, and then continued selling down to the October low. If they were to get that, there would probably be a bounce from that support. If there was another reversal down from a lower high, there would be a head and shoulders top. Sept. 2 would be the left shoulder and Nov. 22 would be the head.

A major sell signal has a 40% chance of leading to a major trend reversal (here, into a bear trend). There would still be a 60% chance of the E-mini continuing sideways or resuming up.

The bulls are hoping Friday was just a second leg bear trap in a strong bull trend. They will need a bull bar closing near its high today or tomorrow to convince traders that the E-mini will make a new high before the end of the year.

What to expect today

E-mini is up 38 points in the overnight Globex session and it appears it will gap above Friday’s high. Whether or not today gaps up, if it opens near the high of a big bear day, there is an increased chance of an early low of the day and then a big bull day. While it is possible that today will be another big bear day, it is less likely now that it is opening near Friday’s high.

If today closes below its midpoint, it will be a reasonable follow-through day after Friday’s collapse. It will be a Low 1 sell signal bar on the daily chart. But, if it is a big bull day, the E-mini will probably rally in December, and the year still might close at a new high.

With Friday being mostly sideways, the E-mini could get stuck in Friday’s range and oscillate around the open of the month, and then wait for tomorrow when November ends to decide if November will have a bear bar on the monthly chart. Friday would then simply have been a test of the open of the month.

On the other hand, if today is a sideways day, the open of the day could be a magnet at the end of the day. If there is a bull body, the bigger it is, the more likely tomorrow will trade high. If today is a big bull day closing near its high, the E-mini might rally strongly through the end of the year.

What about Omicron? Mostly irrelevant. The selloff started a week before it made the news. The selloff was technical. It was simply a test of the open of the month, and it would have happened with or without the new COVID variant. Omicron was the excuse for the market to do what it was going to do.

So, if not Omicron, then something else would have been the excuse…inflation, China, Russia…you pick.

End of the month and end of the year

Tuesday is the final trading day in November. When October formed a big bear bar, I said that there should be a second consecutive bear bar within 2 months. The E-mini is back to the open of the month, and November might become that second bear bar.

If the bears get a bear bar, especially one with a reasonably big bear body and close near its low, November will be a good sell signal bar on the monthly chart. Traders will look for a reversal down from a failed OO buy signal.

Remember, September and October were consecutive outside bars, which created an OO Breakout Mode pattern. The buy triggered when November traded above the October high. If November forms a good bear reversal bar, it would be a reasonable sell signal bar for a failed OO buy signal. That would increase the chance of December trading down.

I said that a bar often reverses right before it closes and tests some significant price. On the monthly chart, Friday tested the open of the month.

It is important to understand that the test could lead to a sharp reversal. Therefore, traders should not be surprised if November rallies sharply over the next 2 days and closes back near its high, despite the big selloff and only having 2 days remaining in the month.

I want to make a point about the yearly chart, which I will post in early January. The year opened on its low and it is now at its high. Most big bull bars have conspicuous tails on top. It usually comes from a pullback just before the bar closes. That is why I have said several times in November that there was an increased chance of a reversal in December. Bars often change their appearance just before they close, and what happens in December is just before the 2021 bar closes on the yearly chart.

The computers know this tendency. The bull computers will try to overwhelm the bear computers and get the year to close on its high. Therefore, there is an increased chance of a big move in either direction in December. If the year closes on its high, there will be an increased chance of higher prices early next year. But if December is a bear bar closing near its low on the monthly chart, the new year will probably trade down.

Is this the start of a correction? I have said many times that the E-mini has been in a strong bull trend on the daily, weekly, and monthly charts since the pandemic crash. There have been a few times when the bears got the probability of a correction up to 50%, but never more. If there is follow-through selling early this week, this will be another one of those times.

I have also said that the probability of higher prices has been between 50 and 60% during this entire bull trend. It has never been below 50%. That continues to be true.

The strong selloffs like in September push the probability for the bears up to 50%. But every prior reversal has failed, and the bears never had better than a 50% chance of a trend reversal.

If the bulls get a strong reversal up this week, the probability of a new high by the end of the year will be again back to 60%.

The next few days should give traders an idea of what will happen in December.

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