With the market’s position still deep within the middle-half bowels of its incessant 7-month lateral range where the odds of aimless whipsaw risk are approached as higher, a more conservative approach to risk assumption is warranted. But before identifying some specific levels around which to navigate directional biases and exposure, we’d like to start with some technical facts that need to be considered when choosing a path and defining the risk associated with doing so.
First and from a long-term perspective, there are two things that jump off of the weekly log scale chart below:
- the market’s position still within the 7-month range between May’s 6.41 high and Sep’s 5.07 low where the odds of aimless whipsaw risk must be considered high, and
- still-historically extreme levels (93% currently) in our RJO Bullish Sentiment Index reflecting a whopping 358K Managed Money long positions to just 26K shorts reportable to the CFTC.
This second fact is what should be worrisome to bulls if/when this market threatens, let alone breaks the 3-month rally from 07-Sep’s low.
Drilling down a bit to a daily close-only chart, only a glance is needed to see that upside momentum has been dying on the proverbial vine since early-Nov. The developing POTENTIAL for a bearish divergence in momentum is clear. However, a close below 30-Nov’s 5.68 corrective low is required to CONFIRM this signal to the point of non-bullish decisions like long-covers and bear hedges by longer-term commercial players. Until and unless such weakness is proven, at least the intermediate-uptrend remains intact and should not surprise by its continuance or acceleration.
Drilling down even further, the hourly chart below shows today’s break above last Fri’s 5.94 high that reaffirms the shorter-term uptrend from 30-Nov’s 5.62 intra-day low. This continued strength defines Mon’s 5.82 low as the latest smaller-degree corrective low the market is now required to sustain gains above to maintain a more immediate bullish count. Its failure to do so will confirm a bearish divergence in very short-term momentum that will, in fact, break the uptrend from 30-Nov’s 5.62 next larger-degree corrective low. Per such, Mon’s 5.82 low is considered a mini risk parameter from which shorter-term traders with tighter risk profiles can objectively rebase and manage the risk of bullish exposure.
We’ve discussed this issue of technical and trading SCALE before. We cannot conclude a larger-degree failure below a level like 5.62 from a smaller-degree failure below 5.82. However, virtually every larger-degree failure starts with exactly such a smaller-degree failure. And given the market’s condition in the middle of the 7-month range and inherent whipsaw risk as well as the extent to which the Managed Money community has its neck sticking out on the bull side, we believe 5.82 and especially 5.62 are this market’s key flexion and decision-making points commensurate with one’s personal risk profile.
In sum, a cautious bullish policy and exposure remain advised with a failure below 5.82 required for shorter-term traders to step aside and continued weakness below 5.62 for longer-term commercial players to follow suit and also move to a bear hedged position. In lieu of such weakness, further gains should not surprise. But beware “up here”.