Pre-Open Market Analysis
The Emini gapped up on Friday and therefore created an island bottom bull flag. Because it did not break above the island top of 2 weeks ago, some bears are holding short. Hence, they are betting that the 5% correction began with last week’s top. While they might be right, the Emini is holding above the moving average. Furthermore, it is in a bull trend. Therefore, the odds favor higher prices.
IOI On Weekly Chart
Last week formed an inside bar after an outside bar on the weekly chart. This is therefore an ioi setup. While it is a bull flag, the rally of the past 8 weeks was weak. Furthermore, the Emini never tested the August high. Therefore, the odds of a strong rally from here are small. Hence, a bull breakout above the ioi will probably not go far.
An ioi is a breakout mode pattern. Yet, the weekly chart has had 5 consecutive bull trend bars. In addition, last week was a bull bar. That is therefore a weak sell signal bar for bears hoping that the ioi is the start of a bear trend. As a result, it is more likely that bulls will buy below last week’s low.
Overnight Emini
The Emini is down 6 points in the Globex session. It might therefore open below Friday’s low. As a result, Friday would become a 1 day island top. When last week created its island top, I wrote that island tops are often followed by island bottoms and other island tops. This is trading range price action on the daily chart. Yet, the odds are that the Emini will test the August high within the next couple of months. That is about 100 points lower.
A 2nd island top has a higher chance of success than the first. Hence, traders will therefore be more ready to sell and hold short if a selloff begins. This would therefore be different from what they’ve done for months when they bought every reversal down.
If today gaps below yesterday’s low and there is strong selling for 2 – 3 days, the odds will begin to favor the start of the 5% correction. Because the bears need at least one big bear trend bar to make traders begin to believe in a selloff, traders are ready to sell. That one big bear bar would start to run stops below all of the minor higher lows of the past 2 months. The selloff therefore could be fast.
Without that big bear trend day, the odds favor sideways and higher prices. Yet, it is more likely that the Emini has the 5% correction before reaching the measured move targets between 2340 and 2375.