RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

The market’s failure this morning below 10-Feb’s 122.175 corrective low and our short-term risk parameter discussed in 12-Feb’s Technical Webcast confirms a bearish divergence in daily momentum that defines 16-Feb’s 126.70 high as the END of at least the portion of the uptrend from 14-Jan’s 116.275 low and possibly the end of a prospective 3rd-Wave rally from 20-Nov’s 113.05 low as labeled in the daily chart below.  Per such, this 126.70 level becomes our new short-term risk parameter from which traders can objectively navigate either a larger-degree (4th-Wave) corrective setback OR a broader peak/reversal environment.

But is the past week’s relapse “just” a correction OR start of a more protracted reversal?  This is where our three reversal requirements come in:

  1. a confirmed bearish divergence in momentum – CHECK
  2. proof of trendy, impulsive price action in the direction of the new trend – MAYBE CHECK (the jury’s still out on this)
  3. and most importantly, proof of labored, corrective, 3-wave behavior on a subsequent recovery attempt – UNCHECKED.

While there are certainly some longer-term threats to the bull we’ll discuss below, this market has been in a major 65% bull move that dates from last Apr’s 76.60 low.  The forces behind this bull aren’t going to evaporate quickly into thin air.  Such peak/reversal process typically include that initial bearish divergence in momentum that breaks the bull trend AND THEN a corrective recovery attempt that falls short of the rejected high before the market turns south once again.  This third and most important reversal requirement has not yet been satisfied.  And while today’s mo failure suffices for shorter-term traders to move aside from a bullish policy, it s the likelihood of this 2nd- or b-wave or right-shoulder corrective rebuttal that warns against chasing new bearish exposure lower at this juncture.

From a longer-term perspective, commensurately larger-degree weakness below 12-Nov’s 118.90 (suspected 1st-Wave) high is required to jeopardize the impulsive integrity of the resumed major uptrend from 26-Oct’s 108.625 low.  Per such, this level serves as our new long-term risk parameter pertinent to longer-term commercial players.  While “some” defensive steps like perhaps paring bullish exposure to more conservative levels may be appropriate for longer-term players, the past week’s setback is of an insufficient SCALE thus far to conclude a longer-term peak.  Indeed, the market has thus far only retraced roughly 38.2% f the (suspected 3rd-Wave) rally from 113.05 to 126.70 and remains above a goodly amount of former 119.90-to-118.90-area resistance-turned-support.  If/when stemmed by a bullish divergence in short-term momentum, this setback may be viewed as another favorable risk/reward opportunity from the buy side for longer-term players.

From an even longer-term perspective, two considerable peak/reversal-threat factors must now be acknowledged now that today’s bearish divergence in momentum has at least interrupted the bull and defined a specific high and risk parameter at 126.70 that the market has to recoup to confirm this setback as a (4th-Wave) correction and reinstate the bull:

  1. historically frothy bullish sentiment/contrary opinion typical of major peak/reversal environments and
  2. the market’s proximity to the extremes upper recesses of the 94-to-130-range that has constrained most of the past 4-1/2-years’ prices and repelled all four previous rally attempts.

Along with today’s bearish divergence in momentum, it’s not hard at all the question the risk/reward merits of a continued bullish policy “up here”.  Because of the magnitude of the past 10 months’ major uptrend, it is certainly premature to conclude a major peak/reversal from just the past week’s setback.  The next key factor in this correction-vs-reversal debate will be HOW the market recovers from this relapse.  IF the major bull is still intact, the resumed rally would be expected to unfold in a trendy, impulsive, sustained manner.  Alternatively, a labored, struggling, 3-wave recovery would not only reinforce a broader peak/reversal count, but also provide what could be an outstanding risk/reward opportunity from the bear side.

These issues considered, shorter-term traders have been advised to move to a neutral/sideline position to circumvent the depths unknown of a correction or reversal lower. Longer-term players remain OK to maintain a bullish policy and exposure with a failure below 118.90 required to neutralize exposure.  We will be watchful for a relapse-stemming bullish divergence in short-term momentum from some level between spot (121.40) and 119.90 needed to arrest this relapse and expose the critical and informative recovery attempt that would be either a resumption of the major bull or a corrective selling opportunity within a major peak/reversal environment.  Exciting, opportunistic times immediately ahead.

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