Labored Gains, Crazy Bullish Sentiment Warn Cotton on Slippery Slope

November 29, 2016 2:12AM CST

In last Wed's Technical Blog we identified that day's overnight spasm low of 70.63 as a short-term risk parameter that, if broken, would contribute to a peak/reversal-threat environment that could have severe downside consequences.  The market relapsed below 70.63 on Fri but has thus far "held" above Fri's 70.40 low and even retraced sharply to yesterday's 72.30 high detailed in the 240-min chart below.  By the same token however this market has demonstrated admittedly short-term weakness and vulnerability by failing to sustain mid-Nov's break above a MONTH'S worth of former resistance from the 71.45-to-72.00-range that should have held as new support if the market was truly strong "up here".

While this short-term "non-strength" is insufficient to conclude a larger-degree peak/reversal environment, we believe continued historically frothy bullish sentiment accorded this market weighs on it as a factor that could prompt huge, surprising losses if the market cannot resuscitate the past few months' recovery above 17-Nov's 72.75 high.

Cotton 240

On the next larger scale the daily log scale chart below shows a still-arguable near-3-month uptrend as long as the market sustains gains above 04-Nov's 68.30 larger-degree corrective low and key long-term risk parameter.  This said however and on the heels of Aug's sharp, trendy, impulsive decline, the extraordinarily labored recovery attempt from 01-Sep's 65.85 low looks about as corrective and consolidative as it gets.  If correct, this assessment that the past quarter's labored recovery is a correction warns of an eventual resumption of Aug's downtrend that preceded it.  Such a sub-68.30 and even sub-65.85 decline would come as quite the shocker to the Managed Money contingent that remains grossly bullish.

Cotton Daily \

Cotton Weekly

The weekly log scale active-continuation chart above shows this year's major and impressive reversal of at least the 2014 - 2016 bear market from 97.35 to 54.53.  Stalling with four measly ticks of the (78.02) 50% retracement of 2014-16's 97.35 - 54.53 decline however is a factor that contributes to a broader peak/reversal environment.  The more indicting evidence of a peak-threat however is the combination of:

  • early-Aug's bearish divergence in momentum that broke this year's uptrend
  • proof of trendy, impulsive behavior on the initial counter-trend sell-off and, most importantly,
  • historically frothy levels in our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC.

Indeed, at a current whopping 91% reading reflecting 90K Managed Money long positions to just 9K shorts, this indicator warns of potentially tremendous downside vulnerability until and unless the market mitigates the applicability of sentiment as a technical tool by reinstating the longer-term uptrend above at least 72.75.  Resumed weakness below Fri's 70.40 low would be the next reinforcing factor to a peak/reversal-threat environment that could produce significant losses because the consensus is so bullish.

The weekly log close-only chart below shows the market thus far holding above a ton of former resistance-turned-support around the 67-handle-area that would be consistent with a broader BULLISH view.  But again, given the developing threats to the bull, it really needs to re-exert itself with a move to new highs above 72.75 to mitigate these threats.  The Fibonacci fact that the rally from 11-Nov's 68.44 low spanned a virtually identical length (i.e. 1.000 progression) to Oct's initial 66.98 - 70.82 rally reinforces a count that suggests Oct-Nov's recovery attempt is a textbook 3-wave correction ahead of an eventual resumption of Aug's downtrend that could expose steep, even relentless losses in the months ahead.

Cotton Weekly

Finally, the monthly log active-continuation chart below shows this year's recovery relative to the 2014 - 2016 bear and even the secular bear market from 2011's 219.70 high.  There's no question that the magnitude of the bullish divergence in MONTHLY momentum warns of a looooong-term base/reversal environment.  But it's quite common for such base/reversal PROCESSES to include corrective rebuttals to initial counter-trend rallies that can be quite extensive in terms of both price and time.  Until this market revives strength above at least 72.30 and preferably 72.75, we believe the stubbornly frothy bullish sentiment and recent short-term bearish divergence in momentum warns of such a correction lower that we believe could produce steep losses below 01-Sep's 65.85 low.

These issues considered, a bearish policy is advised from current 71.00 levels OB with strength above 72.30 required to threaten this call enough to warrant moving to the sidelines.  In lieu of such strength we anticipate further and possibly significant losses with a relapse below Fri's 70.40 low providing the next reinforcing evidence to this bearish call.

Cotton Monthly

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