Posted on Aug 03, 2023, 08:02 by Dave Toth

In recent updates, as we’ve negotiated the roll from the Aug to Dec contracts and the discrepancies between Dec contract prices and those on an active-continuation basis, we’ve discussed at least short-term weakness stemming from 28-Jul’s bearish divergence in short-term momentum in the Dec contract introduced in that day’s Technical Blog.  The 240-min chart (above) and daily log chart (below) of the Dec contract show the past couple days’ continued erosion that, by breaking 27-Jul’s 1981.2 low, leaves Mon’s 2010.9 high in its wake as the latest smaller-degree corrective high this market is now required to recoup to mitigate at least the intermediate-term downtrend and, as we’ll discuss below, the prospect for a sharp and deep plunge straight away.  Per such, we’re defining this week’s 2010.9 high as our new short-term but key parameter from which the risk of non-bullish decisions like long-covers and bearish punts can be objectively rebased and managed.

Before moving to an active-continuation basis, please note our reference to the 1941.7 level as a still-arguable BULL risk parameter in the daily chart of the now-prompt Dec contract below.

Moving to an active-continuation basis, the daily high-low chart above shows 27-Jul’s 1941.7 low in the then-prompt Aug contract as the level the market needs to sustain gains above to maintain the uptrend from 29-Jun’s 1900.6 low.  Its failure to do so will confirm a bearish divergence in momentum, break the 5-week uptrend and expose at least a corrective rebuttal to the 1900.6-to-2010.9 rally and possibly a plunging resumption of May-Jun’s downtrend to levels below 1900.

The prospect for what many may perceive as a shocker to the downside is predicated on a wave count that contends that 31-Jul’s 2010.9 intra-day high and 2003.7 high close completed an “irregular” bear market correction that actually started from 26-May’s 1936 intra-day low and 25-May’s 1941.7 low close labeled in the charts above and below.  What characterizes and “irregular” correction is the “b”-Wave of correction actually breaking below the start of the correction’s (25- or 26-May’s) lows and then recovering above early-Jun’s initial a-Wave high.  Additionally, the completing c-Wave of the correction often times spans a length that is 61.8% longer (i.e., 1.618 progression) of the initial a-Wave.  And the daily close-only chart below shows 31-Jul’s 2003.7 high being only a buck away from the (2002.6) 1.618 progression of late-May/early-Jun’s 1941.7 – 1995.1 a-Wave taken from 29-Jun’s 1916.2 “b”-Wave low!

Reinforcing evidence to this count will come on the confirmation of a bearish divergence below 27-Jul’s 1941.7 intra-day low and/or a close below that day’s 1946.3 low close.  Should such a momentum divergence be confirmed, reinforcing a count that contends the price action from late-May’s low to late-Jul’s high is a complete 3-wave correction, we would expect the (C- or 3rd-Wave) resumption of May’s initial downtrend that preceded this correction to be characterized by trendy, impulsive and sharp losses to levels potentially well below 29-Jun’s 1900 low.  Given the continued rise in 10-yr T-Note rates and resulting weakness and vulnerability in the gold-positively-correlated currencies and developing weakness in equities this week, perhaps tomorrow’s key nonfarm payroll and unemployment reports will be the fuel that ignites a plunge in metals.

Finally, and while the pivotal 1927-area remains intact as a key area of former resistance-turned-support on a weekly log close-only basis, the chart below also shows 1) the market potentially precarious position at the extreme upper recesses of the past THREE-YEAR range that remains intact as a massive resistance element amidst 2) historically frothy sentiment/contrary opinion levels as evidenced by our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC.  The market hasn’t taken that next larger-degree step of mitigating a bullish count and reinforcing a bearish count, but this would come on a failure below 1941.7.  But on a short-to-intermediate-term scale, we believe the market as certainly provided enough evidence to warn of pending considerable weakness and, MOST IMPORTANTLY, rejected and identified recent highs and parameters from which the risk of non-bullish decisions can be objectively based and managed.

These issues considered, a bearish policy and exposure remain advised for shorter-erm traders with a recovery above 2010.9 required to negate this specific all and warrant its cover.  Longer-term commercial players remain OK to maintain a cautious bullish policy, with a failure below 1941.7 required to not only negate this call but also open a spigot that could result in a sharp plunge to levels well below 1900.

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