Posted on Sep 02, 2022, 09:54 by Dave Toth
In recent updates since 24-Aug’s breakout above 29-Jul’s 431.7 high, including Tue’s Technical Blog, we’ve identified a former area of resistance between 431 and 424 that we believe the market needed to sustain gains above to maintain a more immediate bullish count “up here” at the extreme upper recesses of this years massive range. In addition to this market’s failure to sustain levels above 424 over the past week, yesterday’s slip below 25-Aug’s 413.8 initial counter-trend low confirms a bearish divergence in daily momentum that questions the risk/reward merits of a continued bullish policy and once again warns of at least a reversion to the middle-half bowels of this year’s range and possibly resurrects a much broader peak/reversal threat.
The important by-product of the past week’s latest round of flagging price action is the market’s definition of 24-Aug’s 436.6 high as one of developing importance and a short-term risk parameter from which non-bullish decisions like long-covers, cautious bearish punts and bear hedges can be objectively based and managed. Until and unless such 436.6+ strength is shown, further lateral-to-lower prices are anticipated.
Stepping back to a daily bar chart above and close-only chart below, the market’s latest rejection of the extreme upper recesses of this year’s range is clear. After late-Jul’s impulsive spike above the prior two months’ resistance exposed Mar-Jul’s sell-off attempt as a 3-wave and thus corrective affair, the bull had every opportunity to PERFORM. Since then, the market has labored tremendously in its attempts to move higher, with this week’s relapse another threat to sustained, impulsive behavior higher that questions the risk/reward merits of maintaining a bullish policy and exposure “up here”, especially with a historically extreme skew in bullish exposure by the Managed Money community.
Indeed, looking at the weekly log chart above, the combination of 425+ levels and upper-90% levels in our RJO Bullish Sentiment Index resulted in a 14% decline from Mar to Jul. This combination does not matter to the bull as long as the market sustains the simple uptrend pattern of higher highs and higher lows. When the market fails like it did yesterday, this combination warns of another correction or reversal lower. And again, most importantly, yesterday’s sub-413.8 failure specifies 24-Aug’s 436.6 high as THE high this market now needs to recoup to negate our peak/correction/reversal count that could expose steep or relatively steep losses.
These issues considered, traders are advised to move to a neutral-to-cautiously-bearish policy and exposure from current 417-area levels OB with a recovery above 436.6 required to negate this call and warrant its cover. In lieu of such strength, further lateral-to-lower, and possibly much lower prices should not surprise.