Yesterday and overnight’s recovery above Tue’s 33.78 initial counter-trend high in the now-prompt Apr contract is a relatively short-term event. And by remaining well within the bounds of the past month’s 36-to-29-range, it would certainly be premature to conclude anything too bullish at this juncture. However, for reasons we’ll discuss below, this RESUMPTION of previous (last week’s) strength is something this market has seen little of during its massive bear trend and could be one of the first indications of a reversal higher that could be major in scope, and possibly signalling the end of a 7-1/2-YEAR bear market.
As a result of this resumed strength, the market has identified Tue’s 30.66 low as the latest smaller-degree corrective low that now serves as our new short-term risk parameter from which a new cautious bullish policy can be objectively based and managed. It is indeterminable at this juncture whether the rally from 30.66 is “just” the c-Wave of yet another bear market correction OR the 3rd-Wave of a broader reversal higher. Overnight’s resumed strength also highlights 11-Feb’s 28.74 low in the Apr contract as one of developing importance and a more important and larger-degree risk parameter the market needs to break to negate a base/reversal count.
On an active-continuation chart basis shown in the daily log chart above and weekly log chart below, the market has yet to recoup 28-Jan’s 34.82 corrective high really needed to, in fact, break the major downtrend. The daily chart shows a rather obvious “gap up” today, but this is due solely to today’s roll from Mar to Apr as the prompt futures contract. Nonetheless, this week’s resumed strength highlights 11-Feb’s 26.05 low on this active-continuation chart basis as one of developing importance and quite possibly the END of a wave sequence down that has been years in the making.
Now that the market has PROVEN some semblance of at least intermediate-term strength, market SENTIMENT becomes an applicable technical tool. And everyone knows that sentiment has been historically bearish for the past year. Such levels of extreme pessimism are characteristic of major base/reversal environments and, combined with today’s recovery above Tue’s 33.78 high, contributes to a base/reversal-threat condition.
Finally and perhaps most compellingly relative to a major base/reversal count, the market has thus far rejected the (25.89) 1.000 progression of 2008-09’s initial 147.27 – 33.20 plunge from May’11’s 114.83 high shown in the monthly log scale chart below. We have been discussing this Fibonacci progression relationship as a possible target for the past couple months, warning that no such “derived” level should EVER be relied upon as support without an accompanying bullish divergence in momentum needed to stem the clear and present downtrend. With overnight’s recovery above Tue’s 33.78 initial counter-trend high, we believe the market may be in the process of confirming just such a momentum failure that renders this Fib relationship applicable to a base/reversal count.
Think about this for a moment. 2008-09’s meltdown spanned 114.07 (77.4% decline). The resumed downtrend from May’11’s 114.83 high came within 0.16-cents of equaling 2008-09’s collapse in length on a log scale!!! This is insane but an absolute fact. COMBINED with historically bearish sentiment serves as a source of fuel for upside vulnerability AND the developing bullish divergence in momentum and the acute technical ingredients for a major base/reversal environment are in place.
To be sure, such mega-bear markets typically do not going away easily. Even if the major bear market in crude oil is over, there are likely to be numerous and sometimes extensive corrective retests of the low, so a rush to the bull side is not advised. But from a long-term investment perspective, we believe the risk/reward of maintaining a bearish policy is poor and that, conversely, the risk/reward merits of establishing/accumulating a bullish policy are favorable and may prove outstanding over time.
These issues considered, traders are advised to move to a neutral-to-cautiously-bullish policy and first approach setback attempts to the 32-handle as corrective buying opportunities. A failure below 30.66 will threaten this call and warrant defensive steps while a relapse below 28.74 will negate it and may re-expose the secular bear trend to new lows. A break above 28-Jan’s 34.82 high will reinforce a base/reversal count and may expose accelerated gains thereafter. And finally, given the recent positive correlation between crude oil and the stock market, this prospective bullish count in crude would seem to be consistent with the bullish technical factors introduced in yesterday’s Technical Blog on the E-Mini S&P 500, suggesting the quarter or two ahead could be very interesting indeed for the financial markets and economy.
