The market’s obvious rejection yesterday of the upper recesses of the past month-and-a-half’s range and today’s failure today below our 67.62 short-term risk parameter discussed in Mon’s Technical Blog not only breaks this month’s uptrend from 02-Aug’s 64.12 low, but also resurrects a broader peak/reversal-threat environment from 05-Jul’s 72.25 high that could mean significant losses below 64.12. As a direct result of this relapse the hourly chart below shows that the market has identified yesterday’s 71.32 high as one of developing importance and our new short-term risk parameter from which non-bullish decisions like long-covers and new bearish exposure can be objectively based and managed.
While the daily log scale chart above shows the market back to the middle of the past couple months’ range where the risk/reward merits of initiating directional exposure are precarious to say the least, traders are reminded of the broader peak/reversal environment from the early-Jul high resulting from the unique combination of a bearish divergence in WEEKLY momentum (below) amidst historically frothy bullish sentiment indicated by our RJO Bullish Sentiment index of the hot Managed Money positions reportable to the CFTC.
Indeed, at a still-frothy 85% reading reflecting 91K longs to just 16K shorts, this extent to which the managed money community has its neck sticking out on the bull side provides fuel for downside vulnerability should the overall market force its capitulation. We see this peak/reversal-threat condition time and time again, with the past couple months’ 14% decline in cattle prices the latest example of the forced capitulation of the managed money community’s long-&-wrong position. Now, and until the Oct hog market can threaten this bearish call with a recovery above 71.32, this market should be considered vulnerable to the same type of downside vulnerability.
As a final thought, the daily chart above shows a sharp increase in historical volatility over the past couple months. And again, the market’s current position in the middle of the past couple months’ range is no help with respect to initiating, in this case, bearish exposure as the higher odds of aimless whipsaw risk make the risk/reward merits of a directional punt either way poor. Contributing to this range-center, aimless whipsaw risk challenge is the market’s position deep, deep within the middle-half bowels of the past 14-YEAR RANGE. This affliction does not mean that there aren’t any good intra-range trends to glom onto and generate profit as we’re currently suggesting from the bear side, but it does place an emphasis on identifying specific risk parameters from which to base and manage those positions in a warranted more conservative approach to risk assumption. Further aimless, choppy, frustrating, hair-pulling-out price action should not only not come as surprise, it should be EXPECTED, with trading decisions and expectations adjusted accordingly.
These issues considered, long-term players remain advised to maintain a bearish policy and exposure with a recovery above 72.25 required to negate this call and warrant its cover. A neutral/sideline policy is advised for shorter-term traders until the market provides a tighter risk parameter from which a resumed bearish policy can be more practically and objectively based and managed.