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S&P Engaging (Relatively) Crucial Flexion Point

Posted 01/17/2019 8:54AM CT | RJO Market Insights

Since the depths and impulsiveness of the second-half of Dec’s price plunge, we’ve discussed the pertinence of a month-and-a-half’s worth of support around the 2603-to-2626-range that, following 17-Dec’s breakdown, left that area as a pivotal new resistance candidate.  IF the decline from 03-Dec’s 2814 high is the dramatic 3rd-Wave of an eventual 5-wave sequence down to what would seem like oblivion, we would expect this area to constrain the current and prospective corrective recovery ahead of the bear’s resumption.  The Fibonacci fact that this range includes the (2613) 50% retrace of Sep-Dec’s 2947 – 2317 decline ion a daily log scale basis below would seem to reinforce its importance.

By no means does strength above this pivotal 2626-area mean we’re out of the woods and that the secular bull is poised to resume.  BUT such 2626+ strength would raise the odds that Sep-Dec’s 21% plunge- it’s biggest slide since May-Oct’11’s 22% correction- is “only” a 3-wave event as labeled below.  This would define 26-Dec’s 2317 low as EITHER the END or the LOWER BOUNDARY of a correction/consolidation within the secular bull to eventual new highs above 2947.  In other words, the worst is behind us.

IF the correction ended with 26-Dec’s 2317 low and the secular bull is posturing, then we would expect the market to maintain trendy, impulsive behavior up.  No bearish divergences in momentum.  It’s failure to exhibit such behavior- especially around the current middle-half of Sep-Dec’s 2947 – 2317-range- would raise the odds of further major correction/consolidation that would impeded more in TIME than price and ultimately with one more hairy, emotional (c-wave) decline to the lower recesses of the range intended to turn the huddled masses bearish once again for contrary opinion purposes.

Hopefully this market will reinforce a more immediate bullish count with increasingly obvious, impulsive behavior higher.  Heaven forbid the continuance of a massive consolidation range similar to those gripping the grains markets for the past FOUR YEARS that really wreak havoc, especially for trend-followers and black-box system traders.  Such a multi-month or multi-quarter lateral chop between, say, 2800 and 2350 would be an incredibly challenging, frustrating and costly environment.  But we would have a “trading-range plan” for such, watching for a bearish divergence in momentum from the upper-quarter of this range to shift cautiously to the bear side and, conversely, a bullish divergence in mo from the lower-quarter (like the one discussed in 29-Dec’s Technical Blog) for a favorable risk/reward punt from the bull side.

E-Mini S&P 500 Daily Chart

 

And speaking of shorter-term, intra-range momentum, the daily chart above and 240-min chart below show the developing potential for a bearish divergence in momentum round this relatively pivotal 2626-area.  Tis week’s continuation of the recovery leaves Mon’s 2567 low in its wake as the latest minor corrective low it now needs to sustain gains above to maintain a more immediate bullish count.  Its failure to do so will confirm a bearish divergence in momentum, arrest the rally and expose “something” to the downside.  A relatively minor corrective setback?  Maybe.  A resumption of Sep-Dec’s meltdown?  Maybe.  There’s no way to know.  All we could conclude from such an admittedly minor bearish divergence in momentum is the market’s rejection and definition of a high and resistance that it would have to recoup to resuscitate a bullish count.

Former 2523 resistance-turned-support and 04-Jan’s 2438 corrective low provide the next key downside levels IF the market fails below 2567.  Intermediate-to-longer-term traders would be advised to use these levels as risk parameters to a bullish policy instead of such a tighter risk level like 2567, the benefit of which comes in exchange for whipsaw risk (which is OK if you’re a shorter-term trader).

E-Mini S&P 500 240 Min Chart

 

E-Mini S&P 500 Weekly Chart

The weekly log chart above and monthly log chart below allow us to compare 4Q18’s correction or reversal (the jury’s still out on this) to past historical setbacks.  Market sentiment has, understandably, eroded to historical lows typical of broader BASE/reversal/recovery environments.  This gives us some confidence in relying on 26-Dec’s 2317 low as a massively important low, support and risk parameter to a long-term bullish count.  Heaven forbid a break of that low and the abyss that it would expose.  If/when that low is broken, we would urge all bullish exposure to be neutralized.

But while it’s not hard to make the case that we’ve seen the worst of the correction in terms of PRICE, again, we cannot ignore the prospect that this market may be in a consolidation range between 2947 and 2317 that could span months or even quarters and would leave at least one more scary collapse to the range’s lower recesses before the secular bull resumes.  We will re-address such longer-term matters around the upper- and lower-quarters of the past quarter’s range.  For now we have the smack-dab middle of this range and the higher odds of aimless whipsaw risk typical of such range-center conditions to address.

In sum, a cautiously bullish policy remains advised with a failure below 2567 threatening this call enough to warrant moving to a neutral/sideline position.  A clear, impulsive break above the 2626-area could expose accelerated gains to the upper-quarter of the range where Nov-Dec resistant highs around 2815 would come into play as the next key hurdle.

E-Mini S&P 500 Monthly Chart

RJO Market Insights

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