Preferred Risk/Reward Opportunity to Pare Bullish S&P Exposure

February 20, 2018 9:38AM CST

In 06-Feb's Technical Blog we discussed the "obviousness" of the prior few days' meltdown and likelihood of a more extensive (i.e. 61.8% retrace or more) corrective rebuttal IF that late-Jan/early-Feb decline was just the initial phase of a broader correction/consolidation or reversal lower. The 240-min chart below shows this exact price action that has become even more compelling and opportunistic by virtue of this morning's bearish divergence in very short-term momentum from the immediate area around the (2745) 61.8% retrace of the preceding plunge from 2879 to 2529. This combination of factors defines Fri's 2755 high as one of developing importance and 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.
e-mini_s&p_mar18_240min_chart
IF the plunge from 29-Jan's 2879 high to 09-Feb's 2530 low is just the initial (A- or 1st-Wave) of a more protracted correction/consolidation or reversal lower, the market has now defined a level/high (2755) from which to better prepare for such further weakness. Given the very, very short-term nature of this momentum failure however, according decisions to pare or neutralize longer-term bullish exposure and/or scalp from the bear side come in direct exchange for whipsaw risk.

Indeed, a pop above 2755 would not necessarily negate the prospect for the continuation of a larger-degree correction or reversal lower; only a break to new all-time highs above 2879 would do that. But until such 2755+ strength is proven, the market has been accommodative in identifying a favorable risk/reward level (2755) and condition from which traders of all risk profiles can effective prepare for a more significant correction or reversal lower that most fear.

For those who adhere to the adage of "better being out, wishin' you were in, than in, wishin' you were out," this morning's short-term mo failure from the 61.8% retrace area is for you. This situation allows you to accept and incur whipsaw risk above 2755 versus the greater nominal risk if the market is prepping for another late-Jan/early-Feb re-do to the 2530-area or lower.

e-mini_s&p_daily_chart
The weekly log scale chart below shows the major May'15 to Feb'16 correction/consolidation that included a huge corrective rebuttal to Nov'15's 2110 high before the correction resumed. For what it's worth (which ain't much), we do not believe the current correction from 29-Jan's 2879 high is of nearly the same size as that 2015-16 correction. But until and unless this market recoups at least 2755 and preferably 2879, we act on the premise that there's no way to know the extent of the prospective (C- or 3rd-Wave) resumption of late-Jan/early-Feb's initial 2879 - 2530 decline. We only know with specificity where such a count is deferred or negated: above 2755.
e-mini_s&p_weekly_chart
From an even longer-term perspective shown in the monthly log chart below. the recent setback is grossly insufficient to be considered as anything more than another corrective buying opportunity. Against this secular bull tend backdrop, even a 1.000 progression of Jan-Feb's 2879 - 2529 decline from Fri's 2755 high to the 2420-area would be considered a very favorable risk/reward buying opportunity for long-term players.

These issues considered, traders are advised to move to a cautious bearish policy and exposure from spot (2718) OB with strength above 2755 required to negate this specific call and warrant its cover. In lieu of such 2755+ strength we anticipate further lateral-to-lower prices that could become heated and emotional once again.

e-mini_s&p_monthly_chart

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