New Cocoa Lows Perpetuate Treacherous Falling-Wedge, Define New Risk Levels | RJO Futures

January 27, 2017 2:19AM CST

Overnight's break below the past month-and-a-half's 2106-to-2144-range support reaffirms the major bear trend and leaves smaller- and larger-degree corrective highs in its wake at 2220 and 2258, respectively, that now serve as our new short- and longer-term risk parameters the market needs to sustain losses below to maintain the longer-term bear.  While these are technical facts however, the 240-min chart below shows a falling-wedge pattern that is an extraordinarily treacherous pattern to trade so a more conservative approach to risk assumption remains urged.

Cocoa 240

The thing about such 2-steps-down-1-step-back-up falling-wedge patterns that we have noticed over the decades is that they typically mean one of two things:

  • a slowdown in the RATE of descent that is part of a broader BASE/reversal process OR
  • a sort of "coiling up" before the downtrend ACCELERATES

There is no question at all that the major trend has been reaffirmed as down.  This is an absolute fact that still warrants a bearish policy.  For longer-term reasons we'll discuss below however, a more conservative approach to risk assumption is required and hence the importance of identifying risk parameters from which to objectively base a bearish policy from like 2220 and 2258.

Cocoa Daily

Cocoa Weekly

Risks to the clear and present bear trend are:

  • again, waning downside momentum shown in the weekly log scale chart above
  • understandably historically bearish market sentiment that, in the case of the Bullish Consensus (marketvane.net), recently saw the lowest (16%) reading since Dec 2000 and
  • the market's proximity to Dec'11's 1983 low that serves as the key lower boundary to arguably the past 9-YEAR range.

If there is a place and time to be leery of a major base/reversal process to the past year's collapse, it is here and now (although "now" could span weeks or even months on this scale).

In sum, a bearish policy remains advised.  Despite the MAGNITUDE of the clear and present bear however we urge a very conservative bearish approach with strength above 2220 considered an initial threat to the bear and subsequent strength above 2258 required for even longer-term players to step aside ahead of a larger-degree correction or reversal higher.  Former 2150"area" support is considered new near-term resistance ahead of further losses, but further losses may continue to unfold in a very labored, choppy "falling-wedge" manner does NOT warrant "chasing" bearish exposure lower.

Cocoa Monthly


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