RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

Overnight’s relapse below Tue’s 3708 low detailed in the 240-min chart below reaffirms and reinstates the major bear trend.  The very important by-product of this resumed weakness is the market’s definition of yesterday’s 3843 high as the latest smaller-degree corrective high this market is now required to sustain losses below to maintain a more immediate bearish count.  Per such, this 3843 level serves as our new short-term risk parameter from which traders can objectively rebase and manage the risk of a still-advised bearish policy and exposure.

In Tue’s Technical Blog, trying to find flies in the bearish ointment, we discussed the need for the bear to continue to BEHAVE LIKE ONE in what we believe is a very important couple-week period just ahead.  “Behaving like one” means sustained, trendy, impulsive, even accelerated behavior lower.  As a result of today’s new lows, the market has provided a new, tighter but objective risk parameter precisely at 3843 from which to continue to gauge the bear’s resolve and, most importantly, more deftly manage the risk of a continued bearish policy and exposure.

From a longer-term perspective, what’s at stake here is whether the resumed decline from 31-May’s 4202 high is the steep, accelerating, even relentless 3rd-Wave of a massive 5-wave sequence down from 04-Jan’s 4808 high OR the completing 5th-Wave to the INITIAL 1st-Wave down that would be prone to a potentially multi-month 2nd-Wave corrective recovery WITHIN a major peak/reversal PROCESS similar to that that unfolded between Oct’07 and May’08 before the 3rd-Wave bottom fell out.  (Please see Tue’s Technical Blog for the comparison of this year’s major reversal to the 2007 – 2009 major bear market).

On a broader scale, a recovery above 31-May’s 4202 larger-degree corrective high and key long-term bear risk parameter remains required to diffuse the more immediate bearish count.  An admittedly short-term bullish divergence in momentum above Tue’s 3843 would provide the first, smaller-degree and requisite component to such a larger-degree corrective recovery.  Until and unless this market recovers above at least 3843, the trend remains down on all scales and should not surprise by its continuance or acceleration straight away.  And it is worth noting again, such a more immediate 3rd-wave-down count would be characterized by steep, even relentless losses straight away similar to the second-half of 2008’s meltdown.

Finally, we want to remind traders and long-term investors that the Treasury yield curve has resumed its flattening over the past three weeks following about a 6-week respite.  As of this writing, long-term 30-yr T-bond rates are at the same level as 10-yr T-notes rates, putting the curve on the brink of “inverting”.  At this juncture, whether the curve actually inverts or not (i.e. 10-yr paper yielding MORE than 30-yr paper) really doesn’t matter.  The gross flattening that has been unfolding over the past 16 MONTHS has done the damage and provided the evidence we noted back in late-Jan/early-Feb that warned of tremendous danger to the economy and stock and fixed income portfolios.  This yield curve will likely reverse/steepen into a more normal curve long before the remaining carnage to equities and the economy is over.

These issues considered, a bearish policy and exposure remain advised with a recovery above 3843 required to defer or threaten this call enough for shorter-term traders to take profits and move to the sidelines and for even longer-term institutional players and investors to pare bearish exposure to more conservative levels.  In lieu of at least such 3843+ strength, further and possibly accelerated losses straight away remain expected.

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