Bottom in Cocoa?

October 26, 2016 3:32AM CDT

While overnight's poke above the past couple weeks' 2738-to-2748-range may be just another in a series of corrective hiccups within this year's major slide from 29-Apr's 3240 high, this recovery has left admittedly short-term but important lows in its wake at 2674 and 2625 that the market would now be required to relapse below to confirm this pop as such.  In lieu of such resumed weakness and for longer-term reasons we'll discuss below, we believe the risk/reward merits of a bearish policy have not only become too poor to maintain, we believe traders should not switch to a cautious bullish policy.  Per such 2674 is considered our new short-term risk parameter from which non-bearish decisions like short-covers and cautious bullish punts can now be objectively based and managed.

The daily log active-continuation chart above shows that the market has yet to recoup 05-Oct's larger-degree corrective high needed to, in fact, break this year's major downtrend.  For longer-term players this 2848 high remains as our key risk parameter to a long-term bearish policy.  However, the past week's recovery above initial counter-trend highs is sufficient to conclude a bullish divergence in momentum that tilts the directional scales higher.

Additionally and perhaps most importantly, the weekly log chart below shows the market's failure thus far to sustain early-Oct losses below a TON of former support from the 2731-to-2669-range that then should have held as new resistance if something bigger to the bear side was still unfolding.  Throw in the fact that our RJO Bullish Sentiment Index has return to the lower recesses of its 2-year range that has warned of and accompanied all of its steeper recoveries over this time, and more than enough ancillary evidence exists to suggest that this week's minor strength could morph into a much more significant correction or reversal higher.

Finally, on an even longer-term monthly log scale basis, the chart below shows the market's position pretty much smack in the middle of the 3775 - 1983-range that has constrained it for the past EIGHT YEARS.  Such range-center environments are characterized by aimless whipsaw behavior that provides the foundation for random walk theorists existence.  And under such circumstance we believe a more conservative approach to risk assumption is warranted.

These issues considered and while long-term players remain OK to maintain a cautious bearish policy while the market remains below 2848, we advised shorter-term traders with tighter risk profiles to move to a cautious bullish policy from current 2750-area prices with a failure below 2674 required to negate this call and re-expose this year's major downtrend.  05-Oct's 2848 high is the next pertinent technical threshold above the market, the break of which could expose extended gains thereafter that could span months.  In effect the market has identified 2848 and 2674 as the key directional triggers heading forward.

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