In yesterday's Technical Blog we identified Fri's 2.6400 corrective low as a tight but important risk parameter the market needed to sustain gains above to avoid confirming a bearish divergence in momentum. The market's failure to do so overnight CONFIRMS a mo failure on an admittedly short-term basis. At the moment all we can conclude from this mo failure is that yesterday's 2.7530 high completed the rally from 15-Nov's 2.4260 low and serves as a tight but objective risk parameter from which non-bullish decisions like long-covers and cautious bearish punts can now be objectively based and managed. This momentum failure is of a scale INsufficient however to conclude a larger-degree peak/reversal threat. But for ancillary reasons we'll discuss below, such a larger-degree correction lower is exactly what we believe may lie ahead.
The POTENTIAL for a bearish divergence in momentum is also developing on a daily log scale basis above, but a failure below 15-Nov's next larger-degree corrective low and key risk parameter at 2.4260 is required to CONFIRM this divergence and break Oct-Nov's very impressive uptrend. Setback attempts that fall shy of 2.4260 easily qualify as mere corrective buying opportunities within what we believe is this year's major reversal of the secular bear market from Feb'11's 4.65 all-time high.
Contributing to an environment where an admittedly short-term mo failure could morph into a more significant correction lower is the fact that bullish sentiment has, understandably, swung to such a bullish state. The Bullish Consensus (marketvane.net) has reached a near 3-year high while our proprietary RJO Bullish Sentiment Index- at 81% this week- is at its highest level since Jan 2005! Such extraordinary bullish sentiment does not guaranty lower prices. But while at least yesterday's 2.7530 high remains intact as an objective resistant cap and risk parameter, the market has provided an excellent technical condition from which to respect this frothy sentiment as a negative factor for the time being.
The steepness of Oct-Nov's rally leaves a wide gap between our new short-term risk parameter at 2.7530 and our long-term risk level at 2.4260, so unless one's of a really long-term risk profile, the combination of this short-term mo failure and historically extreme bullish provides an objective condition from which to pare or neutralize bullish exposure until and unless the market recoups 2.7530.
Finally, the monthly log scale chart below shows this year's recovery relative to the secular bear trend from 2011's 4.65 high. Given the magnitude of the secular bear trend this year's recovery still falls within the bounds of a major bear market correction. Nonetheless the unique combination of historically bearish sentiment in 2015 and early this year and a confirmed bullish divergence in MONTHLY momentum is advised to first be taken as a sign of a major reversal of the 5-year bear that may have years of higher prices ahead. A failure below at least former 2.32-area resistance-turned-support would be required to threaten this long-term bullish call.
These issues considered, shorter-term traders have been advised to move to a neutral/sideline position following overnight's failure below 2.6400 with strength above 2.7530 required to reverse this call. Longer-term players are advised to pare bullish exposure to more conservative levels with further weakness below 2.4260 required to jettison a bullish position altogether. We generally anticipate a correction of indeterminable scope in the period ahead, but a correction nonetheless that ultimately will prove to be a favorable risk/reward proposition from the bull side.