In Fri afternoon’s Technical Webcast we identified 14-Aug’s 13.58 minor corrective high as the level the market needed to sustain losses below to maintain a more immediate bearish count. This tight but objective risk parameter was/is particularly important given the market’s recent position at the extreme lower recesses of the past month-and-a-half’s 12.74-to-15.16-range. The market’s recovery above this level this morning CONFIRMS a bullish divergence in momentum that defines last Wed’s 12.92 low as the END of the decline from 01-Aug’s 15.16 high that can now be used as our new short-term risk parameter from which non-bearish decisions like short-covers and bullish punts can be objectively based and managed.
ON the heels of this year’s Feb-Jun collapse shown in the daily log scale chart above, the price action from 28-Jun’s 12.74 low remains arguably corrective/consolidative until the market breaks above 01-Aug’s 15.16 high and key long-term risk parameter. If/when the market breaks 15.16, the odds of a major reversal higher will increase.
This said, a key contributing factor to AT LEAST a lateral-to-higher continuation of a bear market correction and possibly a major reversal higher is the depths to which both measures of market sentiment have deteriorated. Shown in the weekly log scale chart below, such historically bearish sentiment levels are quite understandable given the magnitude of the major downtrend from Nov’16’s 24.10 high. But the combination of a confirmed bullish divergence in momentum (needed to identify a more reliable low, support and bull risk parameter) and such historically bearish sentiment has proven time and time again to be an outstanding one that presents a favorable risk/reward buying opportunity. And while the current combination includes a momentum failure that’s of too minor a degree to conclude a larger-degree low/bottom, we believe the fact that this combination stems from the extreme lower recesses of the past month-and-a-half’s range certainly contributes to a favorable risk/reward condition from the bull side.
The weekly chart above shows a Bullish Consensus (marketvane.net) reading of 26% being the lowest since Feb’16’s end of a major bull market corrective low and resumption of a major uptrend. The current 31% reading in our proprietary RJO Bullish Sentiment Index is the lowest since Nov 2003 and reflects a mere 93K long positions reportable to the CFTC versus a whopping 210.5K shorts. Such a skewed bearish outlook by the Managed Money community can maintain its status indefinitely as long as the downtrend remains intact. But the moment that downtrend is interrupted or compromised, such an extent to which this community has its neck sticking out on the bear side becomes fuel for upside vulnerability, and potentially extensive upside vulnerability.
These issues considered and while acknowledging the prospect for an intra-week setback to the 13.25-area OB, we advised traders to move to a new bullish policy and exposure from at-the-market (13.55) OB with a failure below 12.92 required to negate this call and warrant its cover. We anticipate at least a trend, impulsive return to the upper-quarter of the past month-and-a-half’s 12.74 – 14.16 range and possibly a major reversal above it.