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S&P Confirms Next Phase of Broader Peak/Reversal Threat

Posted 11/14/2018 1:38PM CT | RJO Market Insights

In 08-Nov’s Technical Blog we identified 02-Nov’s 2699 as a shorter-term but very important corrective low and risk parameter the market needed to sustain gains above to maintain a more immediate bullish count.  The 240-min chart below shows the market failing below this risk parameter this afternoon.  The important and factual by-product of this mo failure is the market’s definition of 08-Nov’s 2818 high as the END of the recovery/uptrend from 29-Oct’s 2603 low.

Moreover, this recovery attempt looks to be a 3-wave affair as labeled.  Left unaltered by a recovery above 2818, this 3-wave recovery is considered a corrective event that warns of a resumption of Sep-Oct’s downtrend that preceded it.  Per such, 2818 becomes our new short-term risk parameter from which all non-bullish decisions like long-covers and new bearish punts can be objectively based and managed.  Today’s 2749 high serves as a micro bear risk parameter.

E-Mini S&P 500 240 Minute Chart

E-Mini S&P 500 Daily Chart

Today’s continuation of the past week’s slide takes on potentially monumental importance against the backdrop of a peak/reversal environment we’ve been discussing the past month or so.  Thus far this peak/reversal-threat PROCESS has unfolded in a textbook manner, having corrected a rather extensive 61.8% or more following Sep-Oct’s initial decline, similar to Feb-Mar’s rebuttal to Jan-Feb’s initial decline.

In that Jan-Apr corrective episode, the remainder of the correction unfolded only laterally, holding barely above 06-Feb’s 2529 low by completing the correction on 02-Apr at 2552.  In the current case, there is no way to know whether the rest of this correction will continue to unfold similarly to that Jan-Apr consolidation or break 29-Oct’s obviously pivotal 2603 low and expose potentially significant losses thereafter.  Such a deeper, vertical continuation of the reversal is exactly what the German DAX Index is currently suffering (see weekly chart, bottom).

What we know with specificity however is where this market should NOT trade per ANY bearish count:  above our 2818 short-term risk parameter; so the risk of non-bullish action like long-covers and new shorts has been specifically and objectively identified at 2818.  Until and unless this market recoups 2818, we believe the market’s downside potential is indeterminable and potentially extensive and warrants even greater defensive steps before the the situation becomes obvious and scary and everyone’s heading for the exits at the same time.

To be sure, 29-Oct’s key 2603 low remains intact as support that, who knows, could hold like 06-Feb’s 2529 low held in that previous correction.  And perhaps this week’s relapse is mere aimless chop typical of middle-halves of consolidative ranges.  But should that last bastion of support fold at 2603, the market’s downside potential thereafter could be severe.

In sum, traders are advised to move to a neutral/sideline policy altogether to circumvent the depths unknown of a correction or reversal lower that could be major in scope.  Strength above today’s 2749 high would be a welcome first step against such a bearish count while a recovery above 2818 is required to negate this call and perhaps even re-expose the major bull.  In lieu of such strength however, this market has provided exactly the behavior we feared that warns of greater downside vulnerability.

E-Mini S&P 500 Weekly Chart

DAX Weekly Chart

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