RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

Posted on Aug 30, 2022, 07:50 by Dave Toth

In 23-Aug’s Technical Blog we advised a neutral/sideline position until/unless the market confirms a bearish divergence in short-term momentum to reject/define a more reliable high within the middle-half bowels of this year’s range from which to take a favorable risk/reward punt from the bear side.  While the hourly chart of Globex day-session prices does not yet reflect it, overnight’s clear break below Thur’s 14.29 low renders that low an initial counter-trend low that confirms a bearish divergence in very short-term momentum.  But given that the market has been unable to crack the 14.65-to-14.89-area resistance over the past MONTH, and within the context of a still-arguably multi-quarter peak/reversal threat, we believe this admittedly short-term momentum failure tilts the directional scales enough to the bear side and exposes enough downside vulnerability to resurrect a cautious bearish policy and exposure.

The key by-product of this short-term weakness is the market’s definition and reaffirmation of 29-Jul’s 14.89 high as a key resistance and risk parameter from which a bearish policy and exposure can be objectively based and managed.  Moreover, this relatively short-term risk could allow for early participation in a move south that could have long-term implications.

On a broader scale, both the daily log high-low chart above and close-only chart below show this market remains deep within the middle-half bowels of this entire year’s range where the odds of aimless whipsaw risk are approached as high, warranting a more conservative approach to risk assumption.  However, the market’s lethargic price action following late-Jul’s sharp rebound is consistent with our long-term count that contends the recovery from 05-Jul’s 13.20 low close is a major 2nd-Wave correction within a multi-quarter PEAK/reversal process.  Minimally at this stage, an intra-day break above 29-Jul’s 14.89 high or a close above that day’s 14.74 high close is required to even threaten, let alone negate this long-term bearish count.

Is today’s short-term mo failure 14.29 the start of a massive 3rd-Wave meltdown to levels below 13.00?  There’s no way to know that it is.  But until and unless this market recoups 14.89, there’s no way to know that it isn’t.  Per such and given 1) the risk/reward merits of a cautious bearish bet now and 2) still historically frothy levels in our RJO Bullish Sentiment Index that is a source of fuel for downside vulnerability, traders and hedgers are advised to take advantage of these metrics and consider a cautious, conservative start to building a bearish position and policy.

Stepping back even further, traders are reminded of the technical facts on which a major peak/reversal count is predicated:

  • 23-Jun’s confirmed bearish divergence in WEEKLY momentum amidst
  • historically extreme bullish sentiment/contrary opinion levels
  • a complete 5-wave Elliott sequence from 01Dec21’s 12.05 low that arguably completes
  • a massive 5-wave Elliott sequence from May’19’s 7.91 low.

To even defer this bearish count, the market now needs to recover above 14.89.  To negate it, the market needs to recover above 09-Jun’s 15.85 high.  Until and unless such strength is proven, and especially if this market confirms the next level of weakness and vulnerability below 18-Aug’s 13.76 low, there’s no way to know that this market isn’t vulnerable to what would be a major 3rd-Wave decline to levels well below 22-Jul’s 12.88 low in the continuation of a massive peak/reversal environment.

Contributing to this downside vulnerability is the still-frothy 89% reading in our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC reflecting a whopping 120K long positions to just 16K shorts.  How long this grossly-bullishly-skewed contingent will wait for its reward is, for the most part, conditional on this market’s ability to sustain its uptrend.  Since virtually all black-box algo systems are trend-following systems, what we DO know is that, below some point, these positions will be liquidated en masse.   16-Aug’s 13.76 low may be that point.  03-Aug’s 13.56 low may be that point also.  22-Jul’s 12.88 low is most assuredly that point, exposing steep, accelerated losses thereafter.  If/as these lows are violated, reinforcing our long-term peak/reversal count, we would advise ADDING to current cautious bearish exposure from “up here” at favorable risk/reward levels.

These issues considered, traders and hedgers are advised to establish cautious bearish exposure on a scale-up from 14.25-to-14.30 with a recovery above 14.89 negating this call and warranting its immediate cover.  In lieu of such 14.89+ strength, we anticipated lateral-to-lower, and possibly much lower prices in the weeks and months ahead.

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