Cocoa's Broader Base/Reversal Process Likely to Include (Extensive) Setbacks | RJO Futures

May 19, 2017 8:26AM CDT

Yesterday's continuation of this month's recovery leaves Tue's 1975 low in its wake as the latest smaller-degree corrective low this market now needs to sustain gains above to maintain a more immediate bullish count. Its failure to do so will confirm a bearish divergence in short-term momentum, stem the rally and expose at least an interim correction of the rally from 03-May's 1772 low. In this regard that 1975 low serves as our new short-term risk parameter to a still advised cautious bullish policy.

Cocoa 240 min Chart

 

Cocoa Daily Chart

This tight but objective risk parameter at 1975 can and likely will play an important risk management role in a base/reversal prospect that could be major in scope. Indeed, the combination of:

  • a bullish divergence in daily momentum (above) amidst
  • historically bearish sentiment not seen in at least five years and, in the case of the Bullish Consensus (marketvane.net), in over 16 years and
  • an arguably complete 5-wave Elliott sequence down from Dec'15's 3429 high labeled in the weekly log scale chart below

is a powerful one that warns of a potentially huge base/reversal environment as long as 03-May's 1772 orthodox low remains intact as support and a long-term risk parameter.

HOWEVER.......

Cocoa Weekly Chart

 

...EVEN IF we knew, through some divine intervention, that that 1772 low COMPLETED the secular bear market from the Dec'15 high or even Mar'11's 3775 high, the fundamental and technical forces that have driven the market lower for years are not likely to evaporate quickly. This is true for the ends of most major trends and what accounts for the slowdown in the RATE of the downtrend before the ultimate low and broader base/reversal PROCESS that typically includes often times EXTENSIVE corrective retests of the low after that initial counter-trend rally.

Looking at this market's last major low in Dec 2011, the market spent nearly a year in its initial counter-trend recovery and another six month's enduring an extensive corrective retest of that low before truly yielding to the new bull nearly TWO YEARS AFTER the Dec'11 low.

Currently, the combination of waning downside momentum on a very long-term scale and historically bearish sentiment is a very compelling and opportunistic one. And the Fibonacci fact that the decline from Dec'15's 3429 high is virtually identical in length (i.e. 1.000 progression) to 2011's initial 3775 - 1983 decline would seem to reinforce this base/reversal prospect. However, it will likely be quarters or even years before we can know with greater confidence whether this month's rally is THE start of such a major reversal or merely a larger-degree correction ahead of another round of new lows below 1756.

Regardless of either possibility, we believe a B- or 2nd-Wave corrective relapse (that may be extensive in terms of both time and price) OR a resumption of the secular bear market is highly likely before this market sustains a significant move higher. This is precisely where the importance of our short-term risk parameter at 1975 comes in. We're talking about a major BASE/reversal environment, BUT the next favorable risk/reward "trade" may actually come from the bear side if/when the market stems the current uptrend with a short-term mo failure below a level like 1975.

These issues considered, a cautious bullish policy is advised with a failure below 1975 negating this call and warranting a move to at least the sidelines if not a cautious bearish punts. In lieu of such sub-1975 weakness the trend is up on all practical scales and should not surprise by its continuance or acceleration. After all, that historically bearish sentiment is fuel for potentially huge upside vulnerability.

Cocoa Monthly Chart

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