Posted on Sep 19, 2022, 08:15 by Dave Toth

Beginning from a very long-term perspective, we want to remind traders of the technical elements and facts on which our major peak/reversal process is predicated:

  • 23-Jun’s bearish divergence in WEEKLY momentum discussed in that day’s Technical Blog amidst
  • historically extreme bullish sentiment/contrary opinion levels
  • the market’s rejection of the extreme upper recesses of its historical range and
  • proof of trendy, impulsive 5-wave behavior on May-Jul’s INITIAL (1st-Wave) counter-trend decline.

On heels of such an extensive secular bull market from Apr’20’s 3.09 low on an active-continuation basis and Jun’20’s 3.69 low basis the Dec22 contract, an “extensive” (2nd-Wave) correction in terms of both price and time is typical within major peak/reversal processes.  We believe the recovery from 22-Jul’s 5.62 low that has retraced more than 61.8% of May-Jul’s 7.65 – 5.62 decline in the Dec contract IS this 2nd-Wave correction that, if correct, warns of an eventual and dramatic 3rd-Wave resumption of May-Jul’s downtrend to levels well below 5.62 that may span quarters.

Moving down a notch in scale, the daily log high-low chart above and close-only chart below detail the not-unimpressive recovery over the past eight weeks.  Both these charts show the more than 61.8% retrace of May-Jul’s decline as well as waning, struggling momentum over the past two week, creating the POTENTIAL for a bearish divergence.  As we’ll detail in the intra-day hourly chart below, last Mon’s continued recovery leaves 08-Sep’s 6.59 low in its wake as the latest smaller-degree corrective low we believe this market needs to sustain gains above to maintain a more immediate bullish count.  A failure below 6.59 (6.58 on a closing basis) will CONFIRM a bearish divergence in momentum and at least temporarily stem the uptrend.  Per such, this 6.59/.58-area is considered our new short-term but key risk parameter around which non-bullish decisions like long-covers and bearish punts can be objectively based and managed.

It is important to note that such a smaller-degree momentum failure is of an INsufficient SCALE to conclude the end of the 8-week suspected 2nd-Wave) correction.  Commensurately larger-degree weakness below 29-Jul’s 6.37 high is required to render the recovery from 22-Jul’s 5.62 low a 3-wave and thus corrective (2nd-Wave) and raise the odds of a dramatic and punishing 3rd-Wave down to levels potentially well below 5.62 in a major reversal of a mammoth 2-YEAR secular bull market.  But against the backdrop of the longer-term peak/reversal elements cited above and especially with our RJO Bullish Sentiment Index at a still-frothy 86% level reflecting a whopping 287K Managed Money long positions reportable to the CFTC versus only 46.5K shorts, we believe this market could quickly become exposed to significant and prolonged downside vulnerability. 

Drilling down further, the hourly chart below details the past month’s rally from 03-Aug’s 5.87 (suspected B-Wave) low that appears to be a textbook 5-wave Elliott sequence to last Mon’s 7.00 high.  An admittedly short-term mo failure below 6.59 will CONFIRM the bearish divergence that would define that 7.00 high as one of developing importance and possibly the start of a major 3rd-wave down that could span months or quarters and span DOLLARS.

These issues considered, traders are advised to pare bullish exposure to a more conservative level and reverse into a new cautious bearish policy and exposure on a failure below 6.59 with a subsequent recovery above 7.00 required to negate that call and warrant its cover.  In lieu of resumed strength above 7.00 and especially following weakness below 6.59 and subsequently 6.36, traders are urged to prepare themselves for what could be a major and opportunistic turning point in the market that could have long-term implications.

RJO Market Insights

RJO Market Insights specializes in forward-thinking analysis, focused on potential market-moving events and dominant factors driving price discovery. Detailed fundamental and technical coverage across multiple commodity sectors is combined with objectively-constructed trade recommendations to provide an industry-leading product for R.J. O’Brien’s Institutional clients, commercial hedgers, introducing brokers and individual investors free of charge. Content is distributed in both text and audio formats, with specialized service offerings provided by account type.
For more information on RJO Market Insights, contact your broker or RJO representative.