Posted on Dec 15, 2023, 08:22 by Dave Toth

JAN HEATING OIL

With the market eking out a high above Tue’s 2.6281 smaller-degree corrective high and our short-term bear risk parameter overnight, it has confirmed a bullish divergence in short-term momentum that defines Wed’s 2.4838 low as the end of the downtrend from 30-Nov’s 2.8722 larger-degree corrective high.  Per such, diesel has joined crude oil and RBOB in a base/correction/recovery threat that requires a relapse below 2.4838 to conclude the recovery corrective and reinstate the past quarter’s broader downtrend.  As a result of this bullish divergence in short-term mo, we are identifying Wed’s 2.4838 as our new short-term parameter from which the risk of non-bearish decisions like short-covers can be objectively based and managed.

Stepping back to consider the past three months’ broader downtrend however, it would be quite premature at this juncture to conclude anything more from overnight’s bullish divergence in short-term mo than another corrective bounce within the broader downtrend.  Indeed, the daily bar chart of the Jan contract above and close-only chart below show the market still below former support-turned-resistance around the 2.65/2.66-handle areas, let alone 30-Nov’s 2.8722 larger-degree corrective high the market needs to recoup to, in fact, break the 3-month slide.

Does this mean we can ignore the possibility of a more protracted correction or reversal higher?  No.  But we can now gauge or navigate such a prospect by requiring this market to 1) not fail below 2.4838 and 2) follow up today’s bullish divergence in momentum with trendy, impulsive behavior on rally attempts and, most importantly, 3-wave corrective behavior on relapse attempts.  It will be such proof of 3-wave corrective behavior on what we believe is a likely rebuttal to the past few days’ recovery that would be the next reinforcing step to a larger-degree move higher and a preferred risk/reward opportunity from the bull side.

Considering an active-continuation basis, the daily log chart above and weekly log close-only chart below show the magnitude of the 3-month downtrend.  Against this broader backdrop, overnight’s bullish divergence in short-term mo hardly registers.  Furthermore, our RJO Bullish Sentiment Index still shows a frothy 72% reading reflecting 47K Managed Money longs to just 18K shorts, maintaining fuel for downside vulnerability.  By contrast, and as discussed below, our RJO Bullish Sentiment Index in crude oil is wafting around historical LOWS and is an element warning of a broader BASE/correction/reversal higher.  As it is unlikely for crude and diesel to trade disparately for too long, we could see a bigger recovery in crude oil pulling up diesel.

These issues considered, the short-term trend is up within the still-arguable longer-term downtrend.  Overnight’s bullish divergence in short-term momentum suffices for traders to pare or neutralize bearish exposure with a relapse below 2.4838 negating this call, reinstating the bear and exposing potentially sharp losses thereafter.  Longer-term commercial players are OK to pare bearish exposure to more conservative levels and acknowledge and accept whipsaw risk below 2.4838 in exchange for steeper nominal risk above at least the 2.67/2.70-area in the Jan contract.  We will be watchful for proof of 3-wave corrective behavior on an expected rebuttal to this week’s bounce and a countering bullish divergence in short-term mo to stem that relapse for a preferred and favorable risk/reward punt from the bull side.  We will also be watchful for a recovery-stemming bearish divergence in short-term mo from a level south of the 2.67/2.70-area for a favorable risk/reward opportunity to reconsider bearish exposure.

JAN CRUDE OIL

Similarly, the magnitude of Sep-Dec’s $27, 29% decline from 28-Sep’s 95.03 high precludes us from concluding a larger-degree recovery from proof of only short-term strength above Tue’s 71.96 minor corrective high.  However, the combination of:

• the market’s proximity this week to the extreme lower recesses of this year’s range shown in the weekly chart below
• the return to a historically low 63% reading in out RJO Bullish Sentiment Index, and
• an arguably textbook complete 5-wave Elliott sequence down from 95.03 as labeled in the daily log chart above

is a unique and compelling list that emphasizes the importance of Wed’s 67.71 low and its role as an objective parameter from which to manage the risk of non-bearish decisions like short-covers and bullish punts.  A relapse below 67.71 will negate any base/reversal threat, reinstate at least the 3-month downtrend and possibly Jun’22 – Mar’23’s major downtrend to new lows below 64.36.  Here too, IF this week’s rebound is just the (a- or 1st-wave) start something more protracted to the upside, it is imperative that 1) the market NOT fail below 67.71 and 2) prove 3-wave corrective behavior on relapse attempts.  If/when this second requirement is satisfied over the course of the next week or two, a favorable risk/reward opportunity from the bull side may be presented.

Finally and on an even longer-term scale, the monthly chart of crude oil below shows this market deep, deep, deep within the middle-half bowels of its massive but lateral historical range.  Such range-center environs are fertile ground for aimless whipsaw risk that warrants a more conservative approach to directional risk assumption.  Herein lies the importance of even shorter-term directional flexion points and risk parameters like 67.71.