Never can we conclude a broader base/reversal count from just a bullish divergence in short-term momentum. But the extent and impulsiveness of today’s recovery above 25-Jul’s 2.248 minor corrective high and our short-term risk parameter arguably breaks the downtrend from 10-Jul’s 2.476 high.  This defines Mon’s 2.101 low as one of developing importance and our new short-term risk parameter from which non-bearish decisions like short-covers and cautious bullish punts can be objectively based and managed by shorter-term traders with tighter risk profiles.

The prospect that this month’s decline from 2.476 to 2.101 is a (textbook) 5-wave Elliott sequence is labeled in the 240-min chart below.  Also relevant to any base/correction/reversal threat is the market’s gross inability to sustain Mon’s break below 20-Jun’s 2.115 obviously key low and support.

To be sure, major reversal structures require commensurately major proof of, in this case, strength.  And 10-Jul’s 2.489 next larger-degree corrective high remains intact as THE KEY long-term risk parameter the market needs to recoup to, in fact, break Mar-Jul’s major downtrend.  However, ancillary base/reversal-threat factors include:

  • an arguably textbook 5-wave Elliott sequence down from 19-Mar’s 3.003 high on a weekly log scale basis below amidst
  • historically bearish levels in our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC.

The developing POTENTIAL for a bullish divergence in momentum is clear in the weekly chart below, but a recovery above 2.489 remains required to CONFIRM this signal to the point of non-bearish action by long-term players.

Another factor we’ve recently discussed as a contributor to a base/reversal environment that could be major in scope is the market’s recent dip into the lower-quarter of a lateral range that has dominated price action for the past 10 years.  If there’s a time and place on this scale to be leery of a major base/reversal, it is here and now.  Again, today’s bullish divergence in admittedly very short-term momentum is far from sufficient to conclude anything more than another interim corrective hiccup ahead of resume price bashing.  BUT IF this market continues to prove trendy, impulsive price action on this recovery AND proves labored, corrective behavior on subsequent relapse attempts, that will be the next phase of reinforcing behavior to a base/reversal count.  Needless to say, a relapse below 2.101 nullifies this prospect, reinstates the bear and exposes potentially sharp losses thereafter.  By the same token, continued impulsive gains above 10-Jul’s 2.489 high will confirm a major base/reversal count that we believe will be as major in scope as any of the past three major intra-range rebounds over the past 10 years.

These issues considered, shorter-term traders have been advised to move to a neutral/sideline position while longer-term players have been advised to pare bearish exposure to more conservative levels, liquidating remaining exposure on a recovery above 2.489.

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