Mo Failures Threaten Energy Complex Bullish Counts, Expose Potentially Significant Setbacks

October 26, 2016 8:38AM CDT

The past couple days' slip below 13-Oct's 49.79 corrective low confirms a bearish divergence in momentum that defines 19-Oct's 52.22 high as the END of a nice-looking 5-wave Elliott sequence up from 20-Sep's 43.77 low and exposes at least a correction of this portion of the bull.  Per such that 52.22 high becomes our short-term risk parameter from which any non-bullish decisions like long-covers and cautious bearish punts can be objectively based and managed.

Contributing to a peak/reversal threat is the combination of the market's rejection thus far of the upper boundary of a 4-MONTH range defined by 09-Jun's 51.67 high and historically frothy levels of bullish sentiment indicated by our proprietary RJO Bullish Sentiment Index shown in the weekly log chart below.  Indeed, at a current 86% reading reflecting 348K Managed Money long positions reportable to the CFTC to just 56K shorts, this measure of gross bullish sentiment may be considered fuel for downside vulnerability following this week's bearish divergence in momentum.

The daily log chart above shows the market still at levels ABOVE most of the past four months' price action defined by the 49-handle that capped this market as resistance in mid-Aug and now serves as a new support candidate following early-Oct's breakout.  If this area doesn't hold in the period immediately ahead, the extent to which the Managed Money contingent has its neck sticking out on the bull side could expose sharp losses.

These issues considered, we believe the risk/reward merits of maintaining a bullish policy "up here" have deteriorated enough for both short- and longer-term traders to move to a neutral or even cautiously bearish policy with strength above 52.22 required to negate this call and reinstate this year's major uptrend.  In lieu of such strength further and possibly steep losses within the 4-month range should not come as a surprise.

DEC HEATING OIL

Overnight's break below 17-Oct's 1.5625 initial counter-trend low presents a similar peak/reversal threat in diesel to that detailed above in crude oil.  This resumed weakness leaves 19-Oct's 1.6269 high in its wake as the latest smaller-degree corrective high this market now must recoup to render the sell-off attempt from 10-Oct's 1.6400 high a 3-wave and thus corrective affair consistent with this year's major uptrend.  In lieu of such 1.6269+ strength at least the intermediate-term trend is down and should not surprise by its continuance or acceleration.  In this regard 1.6269 is considered our new short-term risk parameter to all non-bullish decisions like long-covers and cautious bearish punts.

Here too, the combination of a bearish divergence in daily momentum and the market's rejection thus far of the 1.6319 upper boundary of the 4-month range defined by 09-Jun's high cannot be ignored as a potentially powerful one that could expose a steep, if intra-range relapse.  On a weekly log active-continuation chart basis, the chart below shows the market still above most of this year's resistance ranging from Jun's 1.5848 high to Aug's 1.5438 high.  But unless this market can recoup at least last week's 1.6269 high, it should be considered vulnerable to further and possibly surprising losses.

In sum, traders are advised to move to a neutral-to-cautiously-bearish policy from current 1.5600-area prices or higher with a recovery above 1.6269 required to negate this call.  In lieu of such strength further and possibly steep, if intra-range losses should not surprise straight away.

DEC RBOB

Similarly, yesterday afternoon and overnight's relapse below initial counter-trend lows and support ranging from 1.4688 to 1.4648 detailed in the 240-min chart below defines last Fri's 1.5173 high as one of developing importance and possibly the END of a 5-wave rally from 20-Sep's 1.2798 low.  Per such 1.5173 is considered our new short-term parameter from which the risk of non-bullish decisions like long-covers and cautious bearish punts can now be objectively based and managed.

On a daily log scale basis above, a break below 13-Oct's 1.4440 corrective low remains arguably required to CONFIRM a bearish divergence in momentum needed to break Sep-Oct's uptrend.  However, we believe the textbook appearance of a 5-wave Elliott sequence up from 20-Sep's 1.2798 low, eroding technicals in the crude and heating oil markets and return to bullish sentiment levels that have warned of and accompanied key declines in the weekly chart below are sufficient to err on the bearish side for the time being and while the market sustains levels below 1.5173.

In sum, traders are advised to move to a neutral-to-cautiously-bearish policy from current 1.4590-area prices with strength above 1.5173 required to negate this call and reinstate this year's major uptrend.  In lieu of such strength further and possibly significant losses are expected.

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This material has been prepared by a sales or trading employee or agent of RJO Futures and is, or is in the nature of, a solicitation. This material is not a research report prepared by RJO Futures Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.