E-mini is up 1 point in the overnight Globex session, which has been in a tight trading range around yesterday’s close. So far it is a continuation of yesterday’s neutrality (a doji bar at a 50% retracement of the December rally).
While the E-mini will probably begin as neutral today, it can always trend in either direction ahead of today’s FOMC announcement at 11 am PT. Day traders will trade like any other day ahead of the announcement. They should exit day trades ahead of the report.
In the first few minutes after the FOMC announcement, the market typically makes a quick move in both directions. It is therefore better to not day trade again until at least 10 minutes after the announcement. After the announcement, be ready for anything, which means a strong trend in either direction, a reversal, or a trading range.
Yesterday’s E-mini setups
Yesterday saw the E-mini gapped down, creating a 5-day island top. However, it reversed up from a 50% retracement of the December rally, the 4600 Big Round Number, and a test of the bottom of last week’s gap up. We closed just above the open and at a High 1 buy signal bar for today.
Since it was a doji bar with a prominent tail on top, it is not a strong buy signal bar.
The 2-day selloff E-mini experienced was an attempt to get the E-mini back to around neutral ahead of today’s 11 am PT FOMC announcement. Traders are deciding if the E-mini close of year will be at a new high. If so, January might gap up, creating a gap on the daily, weekly, monthly, and yearly charts.
December triggered a monthly sell signal when it traded below the November low. If the year closes at a new high, it will be above the November high, which would erase the November sell signal. But, if December closes below the November low, especially if it closes on its low, January should trade down as well.
Which will it be, a new high and higher prices in January, or a reversal down?
While it might appear to be 50-50, in a bull trend, the probability is always at least slightly better for the bulls.
There is a consensus that the Fed messed up by downplaying inflation. And the Fed knows it. Therefore, they will increase the rate of taper and they will raise interest rates sooner than what they have been saying. That is priced in. However, the market might sell off anytime, at least for a day or two, if the Fed says it in today’s statement.
There are still a couple weeks left in December. Even if the E-mini were to sell off for a couple more days, the bulls still would have enough time for the year to close at a new high. However, the bigger the selloff, the more likely January will continue down to the October low, which would be a 10% correction.
The chart is not particularly clear. That means it is in a trading range. And in a trading range, nothing is as clear as traders want. They will buy as the market goes down, sell as it goes up, and take quick profits. The result is a continuation of the range.
At some point there will be a breakout up or down, and then another trend. But until there is a clear breakout, traders will continue to look for reversals.
What about the 5-day island top that formed when yesterday gapped down?
Island tops and bottoms are minor reversal patterns. That means they do not typically lead to trends, although trends rarely do begin with island tops or bottoms. While the 2-day selloff was strong, last week’s rally was stronger. Yesterday’s low was an exact 50% pullback from the December rally.
The bears hope that last week’s rally was a buy vacuum test of the November high. They want the 2-day reversal down (from the lower high double top with the November high) to grow into a bear trend. It probably won’t. Remember, when a market is in a trading range, it tends to reverse, especially once it looks particularly bullish or bearish.
One other difficulty in a trading range is that if a leg grows into a trend, the trend is usually not clear until it is about half over. That means that a clear trend usually will not last much longer before becoming unclear again. And until things are clear, the odds favor reversals every few days.
Also, if there is a big move from here to the end of the year, up is still slightly more likely. Even though 4800 is far above, it is still within reach.
E-mini 5-minute chart
Above is the version that I post every day. Because I often get questions about what Daily Setups Encyclopedia members see, today I am including the example below of that version.
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. Buyers of both the Brooks Trading Course and Encyclopedia of Chart Patterns have access to a much more detailed explanation of the swing trades for each day (see Online Course/BTC Daily Setups).
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. These therefore are swing entries.
It is important to understand that most swing setups do not lead to swing trades. As soon as traders are disappointed, many exit. Those who exit prefer to get out with a small profit (scalp), but often have to exit with a small loss.
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 E-mini.