In last Fri's Technical Blog we identified that day's 3.358 high as the latest smaller-degree corrective high and short-term risk parameter the market needed to sustain losses below to maintain a more immediate bearish count. The market's overnight recovery above this level, as scant as it is thus far, CONFIRMS a bullish divergence in momentum that defines Mon's 3.098 low as the END of a textbook 5-wave Elliott sequence down from 28-Dec's 3.902 high. In this regard 3.098 becomes our new short-term risk parameter from which non-bearish decisions like short-covers and cautious bullish punts can be objectively based and managed. And given the extent and "obviousness" of late-Dec/early-Jan's collapse as, we believe, just the initial decline if a major peak/reversal process, the corrective rebuttal to this collapse could be extensive.
Taking a step back we'd like to remind traders of what we believe to be a major PEAK/reversal environment from 28-Dec's 3.902 high. This long-term bearish count is predicated on:
It is this last, historically frothy bullish sentiment factor that is the most incriminating and warns of a tremendous vulnerability to lower levels as long as 28-Dec's 3.902 high remains intact as a resistant cap and key risk parameter. Nonetheless, peak/reversal PROCESSES often times include EXTENSIVE (2nd- or B-Wave) corrective rebuttals, especially when the initial counter-trend break is as steep, relentless and obvious as early-Jan's break has been. In the 240-min chart (top) we note the 50% and 61.8% retraces of the recent 3.902 - 3.098 decline cutting across at 3.500 and 3.595, respectively. A corrective rebound and ultimate selling opportunity to recover beyond these retraces, and quickly.
The monthly log scale active-continuation chart below shows the last time the RJO Bullish Sentiment Index was this frothy: Feb 2003. The market went into a steep, violent correction within the context of the secular bull trend at the time. The current overzealous bullish sentiment comes within a still-arguable secular BEAR market and the prospect that the recovery attempt from Mar'16's 1.611 low may only be a correction. It's also interesting to note that late0Dec's 3.902 high is only a nickle away from the (3.852) 38.2% retrace of the entire 10-year bear market from Dec'05's 15.78 high to last Mar's 1.611 low.
These issues considered, traders are advised to move to a neutral-to-cautiously-bullish policy from current 3.324-area prices with a relapse below 3.098 required to negate this call and reinstate the developing downtrend. In lieu of such sub-3.098 weakness we anticipate a corrective rebound that could be extensive (i.e. to 3.60 or higher) and ultimately present a risk/reward opportunity from the bear side that could span months and even re-expose the secular bear to new lows below 1.611.