S-T Cable Failure Could Surprise Higher

August 18, 2016 8:14AM CDT

While the market has only recoiled to the middle of the past month-and-a-half's range that could easily be merely corrective ahead of a resumption of the secular bear trend, there area couple factors that warn of potentially surprising gains that must be acknowledged.  The 240-min chart below shows the market's failure to sustain last week's break below our short-term risk parameter at 1.3096 discussed in Tue's Technical Blog.  This bullish divergence in short-term mo leaves Mon's 1.2866 low in its wake as the END of the decline from 03-Aug's 1.3373 high and new short-term parameter from which the risk of non-bearish decisions like short-covers and cautious bullish punts may now be objectively based and managed.

GB Pound 240 Min

GB Pound Daily

Against the backdrop of even the past couple months' downtrend, let alone the secular bear market that is now nearly nine years old, the merely lateral price action thus far from 06-Jul's 1.2798 low shown in the daily chart above is more than likely corrective/consolidative ahead of the bear's resumption to new lows below 1.2798.  On this basis 15-Jul's 1.3482 next larger-degree corrective high remains arguably intact as THE corrective high and key risk parameter the market needs to recoup to threaten the major bear.

On a daily close-only basis however, the chart below shows that Mon's 1.2880 low eclipsed 07-Jul's 1.2909 low, producing the lowest daily close in over 31 YEARS.  The market's rejection thus far of sub-1.2909 levels is an obvious display of "non-weakness".  Can we conclude a more significant low after such a relatively minor display of strength?  Absolutely not.  However, it would be imprudent not to acknowledge the possibility- however remote- that Aug's decline from 1.3356 to 1.2880 might have been the COMPLETING 5th-Wave to an Elliott sequence that could expose a larger-degree correction or reversal above the 1.33/1.34-area.

GB Pound Daily

GB Pound Weekly

Contributing to a base/reversal threat is the developing potential for a bullish divergence in WEEKLY momentum shown above amidst understandably historically bearish sentiment.  Indeed, last week's 20% reading in our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC is the lowest since that that warned of and accompanied Jul'13's major low and reversal higher shown in the monthly log chart below.

As always, traders are reminded that sentiment is not an applicable technical tool in the absence of a confirmed bullish divergence in momentum of a SCALE SUFFICIENT to break the major downtrend.  Overnight's mo failure above 1.3096 is clearly not sufficient to threaten the major bear.  Further strength above at least 02-Aug's 1.3356 close and/or 15-Jul's 1.3482 intra-day high is required for this.  However, while Mon's 1.2866 low remains intact as support and an admittedly short-term risk parameter, traders are not without a reliable, market-defined parameter from which the risk of non-bearish decisions can now be objectively based and managed.

These issues considered, shorter-term traders have been advised to move to a neutral/sideline position and are further advised to first approach setback attempts to the 1.3075-area as corrective buying opportunities with a failure below 1.2866 required to negate this call.  Longer-term players are advised to pare bearish exposure to more conservative levels and jettison the position altogether on a break above 1.3482 intra-day or a close above 1.3356.  A bearish divergence in short-term momentum from the upper-quarter of the 1.2798 - 1.3482-range will tilt the shorter-term directional scale lower.

GB Pound Monthly

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