RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

Posted on Jan 04, 2023, 08:33 by Dave Toth

In yesterday morning’s Technical Blog we highlighted 29-Dec’s 76.779 low as a short-term but important risk parameter the market needed to sustain gains above in order to maintain an alternate bullish count that warned of a larger-degree correction higher.  While it will take a commensurately larger-degree relapse below 09-Dec’s 70.08 low to totally negate such an alternate bullish count, yesterday afternoon’s failure below 76.769 confirms another bearish divergence in short-term momentum that defines yesterday’s 81.50 high as the END of the rally attempt from 09-Decx’s 70.08 low and our new long-term BEAR risk parameter.

As it is indeterminable whether the rally from 70.08 to 81.50 is a 3- or 5-wave affair, only a recovery above 81.50 will answer this question and confirm a larger-degree correction of this year’s major downtrend and first phase of a monster peak/reversal process.  Given the backdrop of what has been a 6-month, $53, 43% meltdown in crude oil prices thus far, yesterday’s 81.50 high is arguably this market’s single most important technical level.  Until and unless it is recouped, and for longer-term reasons we’ll specify below, this high is considered the end or upper boundary and key long-term bear risk parameter to a resumed or maintained bearish policy and exposure.

IF, alternatively, that 81.50 high is the initial A- or 1st-Wave of a larger-degree correction higher, then somewhere between spot and 09-Dec’s 70.08 low, this market needs to arrest this week’s relapse with a countering bullish divergence in short-term momentum.  We will keep a keen eye on this prerequisite in the days immediately ahead and update traders accordingly.  In lieu of such a divergence, a resumption of this year’s major reversal lower should not surprise.

As a direct result of yesterday afternoon’s bearish divergence in short-term momentum, longer-term bearish elements come back into play:

  • the obvious and major downtrend from Jun’s highs where
  • former 79-handle-area support from late-Sep has thus far played its role as new resistance on a weekly close-only basis below
  • Dec’s recovery attempt stalled within 0.45-cents of the (81.05) 50% retrace of Nov-Dec’s 93.74 – 70.08 decline on a daily log scale basis above
  • yesterday’s “outside day” down (higher high, lower low and lower close than Fri’s range and close), and, perhaps most importantly,
  • continued gross bullish exposure by the Managed Money community as indicated by our RJO Bullish Sentiment Index.

Indeed, despite a 6-month, 43% drawdown, the Managed Money community has persistently and stubbornly bet against the second half of 2022’s massive reversal lower.  This long-&-wrong exposure may come home to roost with accelerated losses if/when the overall market forces the capitulation of this grossly bullishly skewed exposure. To even defer this bearish threat, let alone negate it, this market should now be required to recover above yesterday’s 81.50 high and new key bear risk parameter.  Until and unless such strength is proven, a resumption of the 6-month reversal lower to new lows below 70.08 should not come as a surprise.

If there’s a fly in the bearish ointment, it’s the market’s return to the middle-half bowels of its historical lateral range shown in the monthly active-continuation chart below.  We always approach such range-center conditions as having a higher propensity for aimless whipsaw risk that warrants a more conservative approach to directional risk assumption.  Herein lies the importance of yesterday’s 81.50 high as a “longer-term” bear risk parameter.

These issues considered, a bearish policy remains advised for longer-term players with a recovery above 81.50 required to negate this specific call, warrant its immediate cover and reversal into a cautious bullish stance.  Shorter-term traders whipsawed out of bearish exposure from yesterday’s spike above 81.18 are advised to maintain a neutral/sideline position for the time being as the risk/reward metrics of initiating bearish exposure “down here” around the lower third of the past month’s range are poor.  Needless to say, a break below 09-dec’s 70.08 low reinstates and reaffirms the new secular bear trend and exposes potentially steep losses thereafter.

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