RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

While today’s confirmed bearish divergence in momentum, first, below Tue’s 4190 corrective low, and then below 27-May’s 4177 corrective low, is of a relatively short-term scale, it does allow us to conclude Tue’s 4230 high as the END of the uptrend from at least 19-May’s 4055 low detailed in the 240-min chart below.  This defines that 4230 high as one of developing importance and our new micro risk parameter from which shorter-term traders with tighter risk profiles can objectively base non-bullish decisions like long-covers and cautious bearish punts.  It’s easy to see in this intra-day chart how the bull has struggled to go higher over the past week-and-a-half that, especially at the upper recesses of the past month’s range, warns of downside vulnerability that has been confirmed this morning.

What’s potentially troubling from an intermediate-to-longer-term perspective is that this short-term mo failure stems from the extreme upper recesses of the past month’s range capped by 10-May’s 4238 high resulting from 11-May’s bearish divergence in momentum discussed in that day’s Technical Blog.  As a result of that 11-May mo failure, 10-May’s 4238 high remains intact and is now reinforced as a short-term but pivotal bear risk parameter the market is still required to recoup to confirm the end of another corrective/consolidative event and reinstate the secular bull.  Until and unless this market recoups at least Tue’s 4230 high and especially 10-May’s 4238 high, the correction OR reversal threat from 4238 remains intact and could easily mean at least another May-type (C-wave) relapse to the lower recesses of the 4238 – 4029-range, or worse.

In the analysis below, we discuss some sentiment/contrary opinion factors that should keep us alert to the possibility of a more protracted correction or reversal lower, again, until and unless mitigated by a recovery above 4238.

Stepping back, the daily close-only chart below shows the market’s proximity to 07-May’s 4227 high daily close (10-May’s 4238 intra-day high) that, until broken, maintains at least the correction/consolidation from that early-May high and resistance that could easily manifest itself in a return to this range’s lower recesses or below.  This daily chart also shows the importance of technical and trading SCALE, where we’ve identified obvious shorter-term weakness and vulnerability, but that requires commensurately larger-degree proof of weakness below 12-May’s 4052 next larger-degree corrective low to confirm a more protracted correction or reversal lower.  If you’re of a risk parameter where the risk of long exposure to 4052 is too great, your only option is to pare or neutralize that exposure at-the-market as a result of today’s bearish divergence in short-term momentum. Conversely, for longer-term institutional players and general public investors, today’s weakness is of too minor a scale to make adjustments, acknowledging and accepting commensurately larger-degree weakness below 4052 to do so.

We specify these factors and scale issues in order to develop a specific game plan to manage risk.  IF IF today’s short-term weakness is merely part of an intermediate-term bull market correction, this market should not be able to break 12-May’s 4052 low.  If it does, breaking at least Mar-May’s uptrend, then the market would be warning longer-term players and investors of a more protracted correction or reversal lower that, at that specific point, warrants attention and non-bullish action like long-covers.  NOT taking defensive action below 4052 leaves only hope (of a recovery) and a longer-term risk parameter defined by 04-Mar’s 3766 major corrective low as the remaining game plan.  And we know “hope” is not an investment strategy.

What’s especially disconcerting about today’s admittedly short-term momentum failure is that it comes at a time when bullish sentiment/contrary opinion levels have been at historically frothy levels.  The current 60% reading in the Bullish Consensus (marketvane.net) is the highest since Oct’18 that warned of and accompanied 4Q18’s 21% correction.  As for a wave count, we are NOT going to spew about a complete major 5-wave sequence up from Mar’20’s low before a commensurately larger-degree momentum failure confirms this element as a contributing factor to such a top.  But the wave count detailed in the weekly close-only chart is as viable as any and at least warns us to be aware of this developing threat or factor.  And again, to diffuse this peak/correction/reversal threat, all the bull needs to do is recover above at least Tue’s 4230 high.

Another disconcerting element is at least one indication of Americans’ portfolio allocation mix as assembled by the American Association of Individual Investors (AAII).  In both the monthly log scale chart of the E-Mini S&P contract above and the monthly log close-only chart of the underlying S&P 500 Index below, current stock and stock-minus-cash allocation mixes are at historical highs that have warned of and accompanied major peak/correction/reversal environments in the past.

Now it’s crucial to understand that indicators such as these can maintain frothy high levels for months, quarters or even years before the bull ultimately peaks out in a major way.  Indeed, such frothy levels initially turned up in Jan 1998, more than two-and-a-half YEARS before Aug 2000’s dot.com bubble burst.  And to be sure, the very short-term weakness confirmed this morning is nowhere near enough to confirm a major top.  But herein lies the importance of scale and a developing game plan for managing risk if/when today’s minor weakness continues to evolve into larger-degree weakness below levels like 4052.  It’s also worth of note that every larger-degree momentum failure begins with a smaller-degree mo failure exactly like today’s.

These issues considered, shorter-term traders with tighter risk profiles are advised to move to a neutral-to-cautiously-bearish stance at-the-market (4175) if they haven’t done so already on the failure below 4177.  Longer-term players may want to pare bullish exposure to more conservative levels and exchange whipsaw risk (above 4230) for deeper nominal risk below 4052 on a closing basis.  But it is such commensurately larger-degree weakness below 4052 (4029 on an intra-day basis) needed for longer-term institutional players and investors to take the defensive step of neutralizing bullish exposure altogether ahead of a peak/reversal threat at that point that could be major in scope.

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