In Thur's Technical Blog we advised trailing our short-term risk parameter to 23-Dec's 115.40 smaller-degree corrective low. But while the market's failure below this threshold Fri only confirms the end of the rally from 05-Dec's 108.175 low, ancillary evidence warns of a peak/reversal-threat environment that could be major in scope. As a result of this bearish divergence in momentum the market has identified Fri's 118.50 as one of developing importance and our new short-term risk parameter from which all non-bullish decisions like long-covers and cautious bearish punts can now be objectively based and managed.
There's no question that the bearish divergence in momentum is only of a scale that allows us to conclude the end of the rally from only 05-Dec's 108.175 low. HOWEVER, the following facts and observations warn of a peak/reversal-threat environment that could indeed be major in scope:
This last fact is the most incriminating point that, combined with a confirmed bearish divergence in momentum, warns of a vulnerability to lower levels. The last time this Index reflected such a grossly bullish Managed Money position was the month before Nov'14's major peak and a nearly 2-year, 44% collapse. We're not forecasting a similar collapse now. But until and unless this market can diffuse this threat with a recovery above 118.50, what we are forecasting is a vulnerability to lower prices that could be major in scope. Even a Fibonacci minimum 38.2% retrace of Oct-Dec's 97.80 - 118.50 rally doesn't cut across until 110.12.
These issues considered, both short- and long-term traders have been or are advised to move to a neutral/sideline position at-the-market and to next approach recovery attempts to the 117.25-area OB as corrective selling opportunities with strength above 118.50 negating this call, reinstating the recent uptrend and re-exposing potentially significant gains thereafter. In lieu of such 118.50+ strength we believe this market to be vulnerable to potentially significant losses in 1Q17.