A week ago, in 21-Oct’s Technical Blog, we introduced the prospect that the past five months’ sell-off attempt is eerily similar to that that unfolded in 2011 before 2012’s explosive resumption of the secular bull trend to all-time highs. Below, we zero in on this prospect and the key shorter-term price requirements needed to either reinforce this call and expose what could be an outstanding risk/reward opportunity from the bull side or negate it and reaffirm/reinstate this year’s major correction or reversal lower.
Starting at a short-term but not unimportant level, the hourly chart of the now-prompt Jan contract shows yesterday’s poke above 20-Oct’s 12.59 initial counter-trend high. As we’ll show below, this confirms a bullish divergence in DAILY momentum but leaves the market still below a ton of resistance in the 12.67-to-12.79-area that, minimally, this market needs to recoup to confirm the next level or scale of strength that would be consistent with a broader base/reversal prospect. What this admittedly smaller-degree strength DOES confirm are smaller-degree corrective lows and support at 12.27 from 22-Oct and certainly 13-Oct’s 11.96 that can now be considered tighter but objective risk parameters from which non-bearish decisions like short-covers and cautious bullish punts can be objectively based and managed.
As always, we cannot conclude major base/reversal environments from proof of only short-term strength. However, every major base/reversal pattern starts with exactly the type of short-term strength we’ve seen over the past couple weeks. As it is VERY early in a prospective base/reversal threat, it is clear that a relapse below 11.96 mitigates any such call, reinstates the major downtrend and exposes potentially steep, even relentless losses thereafter. So the RISK of any early bullish punts has been specifically identified.
Stepping back to consider the longer-term price action in the now-prompt Jan contract, the daily (above) and weekly (below) log scale charts clearly show former support ranging from 17-Jun’s 12.45 low to 01-Sep’s 12.79 low that, since broken earlier this month, now serves as key new resistance. If something broader to the bear side is still unfolding, we would expect this “area” to hold as new resistance. The more the market nibbles through this area and sustains trendy, impulsive behavior to the upside on a shorter-term basis, the greater the odds will become of a broader base/reversal environment.
Specifically, we’ve identified 27-Sep’s 13.07 larger-degree corrective high as THE KEY risk parameter the market absolutely needs to stay below to maintain a broader bearish count. A recovery above 13.07 will, in fact, break the 5-month downtrend, render Jun-Oct’s decline a 3-wave and thus corrective affair and contribute to a base/reversal count that, like in 2012, could re-expose the secular bull market and produce a trendy, impulsive move to 14.79+ levels.
Before we leave these Jan contract charts, it is notable per any broader base/reversal count that 13-Oct’s 11.89 low is sandwiched between the (11.87) 38.2% retrace of the entire 2020 – 2021 rally from 8.32 to 14.79 and the (11.99) 1.000 progression of Jun’s initial (prospective A-Wave) decline from 14.79 to 12.45 taken from 01-Jul’s (prospective B-Wave) high at 14.25. As always, by themselves, merely “derived” (so-called) technical levels are relatively meaningless. However, COMBINED with a bullish (in this case) divergence in momentum and proof of strength above a resistance area like 12.45-to-12.79, they are powerful contributors to trend reversals.
Now here’s the really interesting, compelling ancillary evidence that we believe forms the basis for a major base/reversal prospect. On a weekly log active-continuation basis above, the resumed (prospective C-Wave) decline from 01-Jul’s 14.23 high in the then-prompt Nov contract came within 12-cents of the (11.96) 0.618 progression of May-Jun’s preceding 16.68 – 12.60 (prospective A-Wave) decline. That 11.84 low was also within spittin’ distance of the (11.68) 50% retrace of 2020 – 2021’s entire 8.18 – 16.68 rally. Additionally, the historically frothy bullish sentiment that warned of and accompanied our peak/reversal call in Jun has eroded to neutral/indifferent/confused levels that won’t inhibit a big move either way.
The wave, sentiment and Fibonacci relationships cited above are virtually identical to those that in 2011’s corrective precursor to the resumption of the secular bull trend:
- the decline from Aug’11’s 14.65 high to Dec’11’s 10.94 low is a clear 3-wave and thus corrective structure
- the C-Wave down from Oct’11’s 12.76 high came within a nickel of the (10.99) 0.618 progression of Aug-Oct’s A-Wave decline from 14.65 to 11.52, and
- our RJO Bullish Sentiment Index eroded from stratospheric levels to a neutral/indifferent/confused level of 46%.
When the market confirmed a bullish divergence in short-term momentum in mid-Dec’11, that rejected/defined an “early” but specific low at 10.94 from which non-bearish decisions like short-covers and cautious bullish punts could be objectively based and managed. It took until early-Feb for the market t take out an initial counter-trend high and confirm a momentum failure of a scale sufficient to reinforce a broader reversal, but the smaller-degree start of the reversal began with exactly the type of price action we’ve seen the past two weeks. The next key base/reversal evidence will come from a trendy, impulsive break above 12.79, with the final hammer coming down on a break above 13.07.
The monthly log active-continuation chart below shows an overview of the past five or six months’ setback compared to Aug-Dec’11’s correction before 2012’s 5th-Wave explosion completed the sequence. Again, it is very early with respect to a broader base/reversal count with proof of strength above the 12.67-to-12.79-area the next iterative reinforcing step and final confirmation above 13.07. But it is NOT too early to start massaging positions accordingly now that the market has identified specific lows and risk parameters at 12.27 and 11.89 from which to do so.
These issues considered, shorter-term traders are advised to move to a neutral-to-cautiously-bullish stance with a failure below 12.27 required to defer or threaten this call enough to warrant moving to the sidelines. Longer-term commercial players are advised to pare bearish exposure to more conservative levels on a recovery above 12.79 and neutralize remaining exposure further strength above 13.07. On such 13.07+ strength, producers would be advised to neutralize all bear hedges while end-users would be urged to institute bull hedges to protect against indeterminable and potentially steep gains thereafter.
