The market’s failure overnight to sustain recent losses below our 16.53 short-term risk parameter discussed in Thur’s Technical Blog confirms a bullish divergence in momentum that defines 09-May’s 16.06 low as the END of the decline from 17-Apr’s 18.655 high and start of either a larger-degree correction higher or possibly a full reversal of the Apr-May plunge. In this regard 16.06 is considered our new short-term risk parameter from which non-bearish decisions like short-covers and bullish punts can be objectively based and managed.
The market’s recent proximity to the extreme lower recesses of the past six months’ range shown in the daily chart below certainly contributes to this base/reversal environment. Furthermore, the steep, uninterrupted nature of Apr-May’s plunge could leave this market vulnerable to a steeper rebound given no former support battleground areas that can now be looked to as resistance candidates save for possibly mid-Mar’s 16.825-area. Once beyond that 16-handle a confirmed short-term mo failure below a prior corrective LOW would be the only way to gauge a peak/reversal threat.
Another factor that contributes to a count calling for higher prices is the past few weeks’ erosion in our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC. This is quite understandable and even expected following the combination of a bearish divergence in momentum and historically frothy sentiment in late-Apr that left the preponderance of bulls vulnerable to the market forcing the capitulation of their long-&-wrong exposure. Now that this indicator has eroded to a relatively low level (current 66% reading the lowest since Jan’16), it no longer serves as the impediment to a bullish count that it was between mid-Feb and mid-Apr.
We would also remind traders of the long-term BASE/reversal count stemming from the first-half of 2016’s break of the secular bear trend from Apr’11’s 49.82 high to Dec’15’s 13.62 low shown in the monthly log scale chart below. While Dec’15’s 13.62 low remains intact a major correction or reversal of the 4-1/2-YEAR bear market warns of lateral-to-higher prices for what could be quarters or even years ahead with an eventual resumption of Dec’15 – Jul’16’s rally to levels above 21.225.
These issues considered, all previously recommended bearish exposure has been covered and traders are next advised to approach setback attempts as corrective buying opportunities. An interim challenge is that the market has yet to complete what we believe is just the initial counter-trend rally from which to gauge a corrective setback level. Regardless, last week’s 16.06 low serves as a short-term but our new key risk parameter from which all non-bearish decisions like short-covers and cautious bullish punts can be objectively based and managed. Lastly, the market’s upside potential should not be underestimated as it could be extensive.