(RB) Stubborn Bulls Maintain RBOB Downside Threat

Technicals, December 15, 2011; 8:40am

For the better part of the past month or so we have advised a neutral/sideline policy for the RBOB market given the aimless whipsaw risk we believed the market's position within the 2.46-to-2.86-range would produce. While the market remains constrained by this range that still poses aimless, lateral whipsaw risk, we'd like to also warn traders of what may be an increased risk of a major downside resolution to the past couple months' chop resulting from the past week's relapse detailed in the 240-minute chart below.

Clearly, last week's momentum failure followed by yesterday's relapse below 09-Dec's initial counter-trend low of 2.5476 low confirms at least the intermediate-term trend as down. Strength above at least Tue afternoon's 2.6344 high (we're ignoring Tue morning's "rogue" high of 2.6754 as technically pertinent) and preferably 05-Dec's 2.6777 high is needed to threaten or negate a developing downtrend.

Taking a step back to consider the past six months' price action, the daily log chart above shows this market still constrained by the past couple months' range, its current proximity to the extreme lower recesses of which could again leave this market prone to a recovery. And while 25-Nov's 2.4480 intra-day low or 2.4542 close remain intact, it is entirely possible that the past couple weeks' relapse attempt is a corrective B- or 2^nd-wave within a broader base/reversal process that could produce sizeable gains in the months ahead.

As the market has yet to produce any technical strength to break the major down-channel that dates from May's 3.4155 high however, it is also just as possible that the recent lateral chop is merely corrective behavior within this year's major and ongoing slide. And herein lies the importance of the 2.6344 and 2.6777 highs and risk parameters specified above. For IF a broader base/reversal process is at hand, the key third of our three reversal requirements- proof of 3-wave, corrective behavior on a subsequent relapse attempt- must now be confirmed. And as a direct result of the past week's confirmed intermediate-term downtrend, the market has very accommodatingly defined levels at 2.6344 and especially 2.6777 it now needs to recoup for us to objectively conclude a broader basing/reversal environment. In lieu of such proven strength and for trend and especially sentiment reasons discussed below, traders are advised to maintain a neutral/hedged-to-cautiously-bearish policy.

For months now we have highlighted the 2.44-to-2.46-range as a major support condition. The 2.44-handle capped this market as major resistance in May 2010 that, when eventually broken in Dec'10, became a source of new support. Combined with neighboring 2.4690 being the 50% retrace of Aug'10 - May'11's 1.7850 - 3.4150 rally, we have approached this area and condition as major support and it has not disappointed in this regard over the past few months.

However....as stated above, this market has yet to provide any concrete evidence of strength needed to break this year's arguably major downtrend. And, shockingly, despite the scope of this year's 28% decline in gas prices, our MRT Bullish Sentiment Index of hot Managed Money positions has GROWN over the past two months to a whopping 91% level reflecting 65K long positions to just 6K shorts. As the corn, soybean, cattle, hog, cotton, gold, silver, copper, coffee and cocoa markets have all shown this year, such gross bullishness leaves a market vulnerable to steep losses when the major uptrend becomes compromised by a confirmed bullish divergence in momentum. This RBOB market's bull trend was compromised six months ago and has been eroding ever since. For such bullishness to remain in the face of this falling knife presents, we believe, a vulnerable condition that could produce steep, forced-capitulation-type losses if the 2.44-handle support is broken.

These issues considered, a neutral/hedged-to-cautiously-bearish policy is advised from the 2.55-to-2.60-range with strength above 2.6344 required to threaten this view sufficiently to warrant moving back to a neutral/sideline position and strength above 2.6777 required to negate this view and reinforce a broader base/reversal threat. In lieu of such 2.6344+ strength and especially if this market breaks the 2.44-handle support, traders should not be surprised further and possibly extreme losses.

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