RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

In yesterday’s Technical Blog, we discussed a bearish divergence in very short-term momentum below Mon’s 6.22 minor corrective low that defined Tue’s 6.40 high as one of developing importance and the possible end to the rally from 13-Jan’s 5.85 low.  Against the backdrop of a major FIVE MONTH uptrend however, we also identified 26-Jan’s 6.16 corrective low as the next larger-degree corrective low the market needed to break to really confirm the break of Jan-Feb’s rally.  While the hourly chart of Globex day-session prices below does not yet reflect sub-6.16 weakness, overnight trading currently shows that 6.16 level being violated.  This continued slide not only reinforces Tue’s 6.40 high as important and our new short-term risk parameter from which traders can base non-bullish decisions like long-covers and cautious bearish punts, but also identifies that high as one from which to now beware of our three key reversal requirements to a peak/reversal threat that could be significant in scope.

At this point, we’d like to discuss two key technical factors:  SCALE and our three key reversal requirements.  First, with respect to scale, the past couple days’ bearish divergence in short-term momentum is clear, and identifies Tue’s 6.40 high as THE high and risk parameter the market must now recoup to mitigate this momentum failure, chalk up the setback as another correction and reinstate the 5-month uptrend ahead of what could be accelerated gains thereafter.  This mo failure is NOT, however, of a scale sufficient to conclude the end of the 5-month rally from 10-Sep’s 5.07 low.  It is clear in the daily chart below that a failure below 03-Jan’s 5.84 larger-degree corrective low and key risk parameter remains required to break this major uptrend.  In effect then, we have a situation where the short-term trend is down within a still-arguable major uptrend.

It is quite OK for even longer-term commercial players to bet, prematurely, on a major reversal, but this acknowledged and accepts whipsaw risk back above 6.40 in exchange for much deeper nominal risk below 5.84.

Secondly, to most effectively and optimally navigate a reversal process, we adhere to three key reversal requirements:

  1. a bearish divergence in momentum (SATISFIED, on a short-term basis); this is where long exposure is covered to neutralize any further profit give-back 
  2. proof of trendy, impulsive 5-wave behavior in the initial counter-trend move lower (we believe this is being satisfied with this week’s break), and most importantly, 
  3. proof of corrective, 3-wave behavior on a subsequent recovery attempt (NOT SATISFIED).

In the hourly chart above, we’ve sketched out the requirement for proof of 3-wave corrective behavior on a recovery attempt needed to reinforce a peak/reversal process on even a smaller-degree basis as, indeed, the market remains well above 03-Jan’s 5.84 larger-degree corrective low and key long-term risk parameter.  In lieu of a sub-5.84 failure or at least proof of a 3-wave corrective rebuttal to this week’s slide, it would be premature to ignore this setback as another correction within the major bull trend ahead of a resumption of that bull above 6.40.

These precepts should be kept in mind when tempted by technical elements we’ve discussed that are typical of broader peak/reversal environments:

  • the market’s proximity to the extreme upper recesses of a NINE MONTH range
  • waning upside momentum
  • an arguably complete 5-wave Elliott sequence from 10-Sep’s 5.07 low and
  • historically stratospheric levels in our RJO Bullish Sentiment Index shown in the weekly log chart below.

This is a unique and compelling list of peak/reversal-threat factors that are enticing for both short- and longer-term traders to get an “early leg up on” another intra-nine-month reversal lower that could be major and opportunistic in scope.  For shorter-term traders with tighter risk profiles, the market has done enough to warrant neutralizing previously recommended bullish exposure.  For those willing to “chase” initial counter-trend weakness in the establishment of new shorts, risk on these shorts is to 6.40.  Our preference and advice is to wait for and require proof of 3-wave corrective behavior on a suspected corrective rebuttal for a preferred and acute risk/reward opportunity from the bear side.  Longer-term commercial players are OK to pare bullish exposure to more conservative levels in order to reduce the risk/cost of profit give-back, but it remains very early in a peak/reversal-threat prices to conclude a reversal and neutralize all bullish exposure.  One benefit of this week’s relapse however, even for longer-term players, is the market’s definition of Tue’s 6.40 high as a specific level from which to base and manage any non-bullish decisions, even if this risk is whipsaw risk.

RJO Market Insights

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