The extent and ACCELERATED manner in which this market continues to rally obviously reaffirms our major base/reversal warning and count introduced in 29-Oct’s Technical Blog with this week’s continuation of the rally leaving Mon’s 123.20 low in its wake as the latest smaller-degree corrective low it is minimally required to fail below to even defer, let alone threaten this roaring bull. Per such, we’re identifying this 123.20 level as our new short-term risk parameter from which traders can rebase and manage the risk of a still-advised bullish policy.
The market and its incredible performance is also the latest poster child for how absolutely ridiculous it is to ever refer to a market as “overbought” (or “oversold”) when referencing any of dozens of momentum indicators available across all data vendors. The use of this term remains rampant in our industry by the technically blind and has no use whatsoever in disciplined technical research except as a mocking punching bag. The ONLY thing that matters in navigating a trend end is a CONFIRMED momentum failure or “divergence”, and this, quite simply, requires a failure below a prior corrective low needed to break the simple uptrend pattern of lower lows and lower highs.
Currently, as stated above, the latest corrective is Mon’s 123.20 low. And this is a smaller-degree low at that, but a low within the clear and present uptrend nonetheless that suffices as an objective risk parameter to a bullish policy. We strongly suspect that before this major bull is over, we will see at least a (suspected 4th-Wave) correction of approximately the same “area” as mid-Nov’s 113.30 – 105.80 (suspected 2nd-Wave) burp and another round of (5th-Wave) highs before this bull shows enough waning upside momentum to threaten a more protracted correction lower. Until even these requirements are satisfied, further and possibly steep gains remain fully expected.
When we introduced the major base/reversal count, historically bearish sentiment/contrary opinion levels were a significant contributing factor. Understandably and as a result of the overall market forcing the capitulation of tremendously skewed bearish exposure by the Managed Money community that has contributed this bull’s rampage, both our RJO Bullish Sentiment Index and the Bullish Consensus (marketvane.net) have recovered smartly. Indeed, the RJO BSI, at 59% currently, is at its highest level in nearly three years. But bulls don’t need to worry about this market getting to frothy to sustain itself as a confirmed bearish divergence in momentum is now required to, in fact, break the clear and present uptrend and render sentiment/contrary opinion an APPLICABLE technical tool. In lieu of such a mo failure, market sentiment simply doesn’t matter and will NOT inhibit this bull from reaching heights that would have been considered shocking just a couple months ago.
The monthly (above) and quarterly (below) log scale charts show how the past couple months’ rally stocks up against its history. Whether this recovery is “just” an interim correction that could span another quarter or two OR a major reversal to 175+ levels remains to be seen. We don’t to ignore the fact that this market has only returned to the middle-half bowels of the past 10 YEARS’ range that remains a middle-half subset of its historical 40-YEAR lateral range where aimless whipsaw risk could arrest this bull in the months ahead. But for now and the foreseeable future, the trend is up on any practical scale and should not surprise by its continuance or acceleration. Upside potential remains indeterminable and potentially extreme with a failure below 123.20 minimally required to even defer, let alone threaten it and warrant defensive steps.