While the market has thus far only satisfied two of our three key reversal requirements, the technical trifecta of:
- a confirmed bearish divergence in WEEKLY momentum amidst
- historically frothy bullish sentiment and
- an arguably complete and major 5-wave Elliott sequence
provides ample evidence to threaten the secular bull trend from Apr’20’s 9.21 low to 18-Nov’s 20.69 high.
These key technical elements are detailed in the weekly log scale chart below that now required a recovery above 18-Nov’s 20.69 high to negate. Emphasis is placed on the current 90% reading in our RJO Bullish Sentiment Index that shows a whopping 259K Managed Money long positions reportable to the CFTC versus only 30K shorts. This technical fact is fuel for downside vulnerability as the overall market forces the capitulation of this long-&-wrong exposure. Until and unless strength above 20.69 is resurrected to negate this bearish count, a major correction or reversal of the 125%, 19-month bull trend could see protracted losses that could span months or even quarters and where even the Fibonacci minimum 38.2% retrace of this major rally doesn’t cut across until the 15.19-area.
The prospect of a broader peak/reversal threat was introduced in 24-Nov’s Technical Blog following 23-Nov’s bearish divergence in short-term momentum below 15-Nov’s 19.64 corrective low. Subsequent impulsive losses below 19-Oct’s 18.82 larger-degree corrective low and key risk parameter confirmed the bearish divergence in weekly momentum that broke the uptrend from at least 31-Mar’s 14.67 low, with the crucial by-product being the market’s definition of 18-Nov’s 20.69 high as THE high and new key risk parameter this market is now obligated to recoup to negate this peak/reversal count and reinstate the secular bull.
The bearish divergence in momentum of a scale sufficient to threaten the secular bull trend and what appears to be trendy, impulsive price action down from the 20.69 high satisfy the first two of our three key reversal requirements. The key and opportunistic third requirement- proof of labored, 3-wave behavior on an expected corrective rebuttal to this initial counter trend break- remains to be satisfied. This market has experienced an extraordinary bull trend, the forces behind which are not going to just evaporate over a period of a couple weeks. Indeed, peak/reversal PROCESSES typically include extensive (B- or 2nd-wave) corrective rebuttals to the initial counter-trend sell-off that often times retrace more than 61.8% of that initial (A- or 1st-wave) decline. As this element and requirement remains to be satisfied, traders are advised to maintain a neutral/sideline policy for the time being as chasing bearish exposure lower on this suspected initial counter-trend decline presents poor risk/reward metrics.
In the period immediately ahead, we will be watchful for a bullish divergence in short-term momentum that will arrest this initial counter-trend break and expose that (B- or 2nd-Wave) corrective rebound that might even present a favorable risk/reward scalp from the bull side. But until such a mo failure stems this slide, further and possibly steep losses should not surprise. Following such a more extensive rebound, the risk/reward merits of a new bearish policy could be extraordinary.
