Pre-Open market analysis
The Emini opened limit down yesterday and sold off to within a fraction of a point of -13%. That is the 2nd circuit breaker level. Instead of hitting the limit, it reversed up strongly.
The selloff was also a test of the December 2018 low. There is a parabolic wedge down to that low on the daily chart. The bulls wanted a reversal up from the double bottom and the parabolic wedge selloff.
Yesterday’s bear body makes yesterday a weak buy signal bar for today. However, a short-covering rally will probably begin at some point this week.
Possible rally, but still in bear trend
It is important to remember that yesterday’s low was 31% below the all-time high. Once the S&P cash index enters a bear market (closes down -20%), the final low is usually about a year later.
There is typically not a new all-time high until a couple years after that. Consequently, even if there is a rally that lasts many months, traders should still expect a test of yesterday’s low before there is a new all-time high.
Can this selloff lead to a crash far below the December 2018 low?
What happens if the Emini breaks strongly below the December 2018 low? Traders would see this selloff as comparable to the 1987 Crash. It could accelerate down in a series of big bear days.
That is unlikely. The selloff is hesitating at support. There is a parabolic wedge sell climax. That typically leads to profit-taking.
Also, the American public is now clearer about the future. While it is depressing, it is less frightening and uncertain. They accept that the infection will be with us for the rest of the year and millions will get infected. It will continue to spread until there is a vaccine next year.
In addition, they now understand that the goal is to slow down the spread of coronavirus so that hospitals will not get overwhelmed. They have made the changes in their behavior.
Finally, the government is trying to stabilize the economy and support business and individuals. All of this will reduce the panic. Everyone will adjust to the new normal. That should soon lead to a trading range on the daily chart.
Overnight Emini Globex trading
The Emini was 5% limit up in the Globex session, but could not hold that level. It is now up less than 1%.
Yesterday was a reversal day. That is a type of a trading day. It was also the 3rd mostly sideways day. The Emini so far are holding the support of the December 2018 low.
If the bears continue to fail to break below that major support, they will take profits. Once traders decide that short covering is underway, the bears will buy back their shorts aggressively and the bulls will buy. This could result in a strong rally that could last a couple weeks and possibly a couple months. Therefore, there is an increased chance of big bull days beginning soon.
The bears have not given up yet. Therefore, there is still a 50% chance of a break below that December low within the next week. The bears might get a couple legs down, but probably not a protracted selloff below that support. It is important to note that a break below major support has a 50% chance of quickly reversing up.
Yesterday’s setups
Here are several reasonable stop entry setups from yesterday. I show each buy entry with a green rectangle and each sell entry with a red rectangle. I rarely also show limit order entries and entries on the close of bars. Buyers of the Brooks Trading Course and Encyclopedia of Chart Patterns have access to a much more detailed explanation of the swing trades for each day.
My goal with these charts is to present an Always In perspective. If a trader was trying to be Always In or nearly Always In a position all day, and he was not currently in the market, these entries would be logical times for him to enter.
If the risk is too big for your account, you should wait for trades with less risk or trade an alternative market like the Micro Emini.