Posted on Nov 28, 2023, 08:52 by Dave Toth

In 17-Nov’s Technical Blog we discussed a bearish divergence in admittedly very short-term momentum as a very early indication of a peak/reversal threat that could morph into a major top given ancillary longer-term technical elements.  The 240-min chart below shows that short-term mo failure below an initial counter-trend low from 08-Nov at 27.18 that defined 07-Nov’s 28.14 high as one of developing importance.  Now, by virtue of the past few days’ continued weakness below 17-Nov’s 27.00 low, the market has confirmed a bearish divergence in daily momentum.

The key takeaway from this continued erosion is the market’s definition of TWO highs at 27.78 and especially 28.14 that it must recoup to render the sell-off attempt from 28.14 another 3-wave and thus corrective affair consistent with the still-unfolding secular bull market.  Until and unless such strength is generated, AT LEAST the intermediate-term trend is down and, for longer-term reasons we’ll discuss below, could evolve into a reversal lower that could be major in scope.  Per such, we’re defining 27.78 and 28.14 as our new mini and short-term parameters from which the risk of non-bullish decisions like long-covers and new bearish punts can be objectively based and managed.

The importance of the bearish divergence in daily momentum below 27.00 is that we can conclude 07-Nov’s 28.14 high as THE END of at least the portion of the secular bull market from 04-Oct’s 25.28 larger-degree corrective low.  However, the rally from 25.28 is arguably the completing 5th-Wave of what looks to be a textbook 5-wave Elliott sequence up from 29-Jun’s 22.06 low.  And this entire Jun-Nov rally looks like it could be the completing 5th-Wave of an even broader 5-wave sequence up from Sep’22’s 17.19 low.  And given that the major rally from 17.19 came within 21 ticks of the (28.35) 0.618 progression of Apr’20 – Nov’21’s major rally from 9.21 to 20.69 on a weekly log scale basis below, we cannot ignore the possibility that 07-Nov’s 28.14 high completed a massive 5-wave Elliott sequence that dates from Apr’20’s 9.21 low as labeled below.

Consistent with and potentially reinforcing such a major peak/reversal threat are waning upside momentum on a WEEKLY scale and historically extreme bullish sentiment/contrary opinion levels as indicated by our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC.  Indeed, at an 85% level reflecting a whopping 229K long positions versus only 40K shorts, fuel for downside vulnerability is in ample supply and could easily resulting in steep, even relentless losses as the overall market forces the capitulation of this egregiously bullish skew.

This said, commensurately larger-degree weakness below 04-Oct’s 25.28 large-degree corrective low and key long-term bull risk parameter remains required to CONFIRM a bearish divergence in momentum of a scale sufficient to expose such a major top.  What the market has in store for us between spot and 25.28 is anyone’s guess at this juncture following the recent continuation of shorter-term weakness below 27.00.  What we DO know for sure is that this market needs to recoup at least 27.78 and especially 28.14 to mitigate this developing downside threat.

Lastly and on an even broader scale, the monthly log chart below shows the market’s residence in the upper-quarter of the past 13-YEAR range where it’s not hard to question the risk/reward metrics of a continued longer-term bullish policy.  To be sure, the market has yet to confirm the weakness on a scale required to truly threaten the secular bull trend.  That key level is 04-Oct’s 25.28 larger-degree corrective low pertinent to longer-term commercial players.  If/when this market fails below 25.28, we believe a massive peak/reversal process will be underway and expose a new secular bear trend.

These issues considered, short-to-intermediate-term traders are advised to maintain or move to a new bearish policy and exposure with a recovery above 27.78 minimally required to defer or threaten this call and warrant its cover.  Longer-term commercial players are advised to pare bullish exposure to more conservative levels and jettison remaining exposure on a failure below 25.28.  Longer-term players also have to option of neutralizing ALL bullish exposure at current levels, acknowledging and accepting whipsaw risk above 27.78 and/or 28.14 in exchange for steeper nominal risk below 25.28.  Next reinforcing proof of this peak/reversal count would be sustained, trendy, impulsive and increasingly obvious behavior to the downside in the period immediately ahead.

RJO Market Insights

RJO Market Insights specializes in forward-thinking analysis, focused on potential market-moving events and dominant factors driving price discovery. Detailed fundamental and technical coverage across multiple commodity sectors is combined with objectively-constructed trade recommendations to provide an industry-leading product for R.J. O’Brien’s Institutional clients, commercial hedgers, introducing brokers and individual investors free of charge. Content is distributed in both text and audio formats, with specialized service offerings provided by account type.
For more information on RJO Market Insights, contact your broker or RJO representative.