RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

Posted on Aug 01, 2022, 10:55 by Dave Toth

Ever since 23-Jun’s bearish divergence in WEEKLY momentum and especially given the extent of the market’s weakness so soon following a massive secular bull trend, we’ve discussed the likelihood of a potentially “extensive” 2nd-Wave corrective rebuttal to the initial counter-trend swoon.  This extensive recovery was realized last week and may have ended as a result of today’s short-term momentum failure below a minor corrective low at 14.04 from Wed and our short-term bull risk parameter.

This short-term mo failure is detailed in the hourly chart below that also identifies Fri’s 14.89 high as not only the end of the rally from 21-Jul’s 12.95 low, but also possibly the end of an “irregular” correction from 06-Jul’s 13.02 low in which the completing C-Wave from 21-Jul’s 12.95 low came within 3-cents of the (14.92) 1.618 progression of early-Jul’s suspected A-Wave of the correction from 13.02 to 14.25.  Per such, Fri’s 14.89 high is considered our new short-term risk parameter from which non-bullish decisions like long-covers, new bearish punts and new bear hedges by producers can be objectively based and managed.  Bull hedges by end-users may also be pared or neutralized until and unless this market recovers above 14.89.

If this count is correct, we would expect to see a resumption of Jun-Jul’s initial 1st-Wave downtrend with a 3rd-Wave collapse below 12.95 that would confirm the past couple months’ peak/reversal count and expose major, multi-quarter or even multi-year losses thereafter.

While commensurately larger-degree weakness below the 22- and 21-Jul intra-day low and low close remains required to CONFIRM this major bearish count, compellingly, today’s short-term momentum failure stems from a high close on Fri at 14.76, just 2-cents away from the (14.76) 61.8% retrace of Jun-Jul’s suspected 1st-Wave decline from 15.82 to 13.20.  From a SCALE perspective, it would be premature to conclude the resumption of a new secular bear market following proof of only short-term weakness today and the market’s residence still deep within the middle-half bowels of this year’s range where the odds of aimless whipsaw risk remain high.  But as a result of today’s bearish divergence in admittedly short-term momentum, this market has satisfied all three of our key reversal requirements, and on a WEEKLY basis no less:

  1. a confirmed bearish divergence in weekly momentum
  2. proof of trendy, impulsive 5-wave behavior on the initial counter-trend decline, and
  3. proof of 3-wave corrective behavior on a subsequent recovery attempt.

If this bearish/peak/reversal count is wrong, all this market minimally must do at this juncture is recoup Fri’s high.  Its failure to do so, let alone further losses ahead, will be consistent with and reinforce this long-term bearish count that we believe currently affords an extraordinary risk/reward opportunity from the bear side.

On a long-term scale, the weekly log chart below shows the major peak/reversal elements of:

  • a bearish divergence in weekly momentum amidst
  • historically frothy sentiment/contrary opinion levels
  • a textbook complete 5-wave Elliott sequence hat dates from 2019’s 7.91 low and
  • a 5th-Wave up from 01Dec21’s 12.05 low that spanned a length 61.8% (i.e. 0.618 progression) of Apr’20 – Jun’21’s preceding rally from 8.40 to 13.14.

In sum and while a relapse below 22-Jul’s 12.88 low and key long-term risk parameter remains required to confirm this major bearish count, both short- and long-term traders are advised to move to a resumed bearish policy on a scale up from at-the-market (13.99) to the 14.50-area with a recovery above 14.89 required to negate this specific call and warrant its cover.  In lieu of such 14.89+ strength, we anticipate further and eventually protracted losses below 12.88 as part of a new major bear market.  Below, we discuss a bear hedge strategy structured from the recent and expected 14.50-to-14.90-area resistance.

PRODUCER BEAR HEDGE:  SHORT SEP SD 14.20 – 14.60 CALL SPREAD / LPONG SEP SD 13.30 PUT COMBO

This strategy involves selling the Sep Short-Dated 14.20 – 14.60 Call Spread for around 14-cents and buying the Sep Short-Date 13.30 Puts around 20-cents for a net initial cost of around 6-cents.  This strategy provides:

  • a current net delta of -37%
  • favorable margins
  • maximum risk/cost of 6-cents if the underlying Nov contract settles anywhere between 14.20 and 13.30 at expiration 25 days from now on 26-Aug
  • fixed and maximum risk/cost of 46-cents on ANY rally above 14.60
    • which would allow the producers cash position to continue to profit
  • virtually unlimited, dollar-for-dollar downside protection below its 13.24 breakeven at expiration.

Please contact your RJO representative for an updated bid/offer quote on the Short Sep SD 14.20 – 14.60 Call Spread / Long Sep SD 13.30 Put Combo.

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