Cocoa Mo Failure Stems Recovery, Exposes Corrective Relapse or Resumed Secular Bear | RJO Futures

May 24, 2017 8:19AM CDT

Given the magnitude of the secular bear trend that everyone knows is unlikely to yield to the bull without a fight, we discussed the high likelihood of at least an extensive corrective retest of 03-May's 1772 low OR a resumption of the secular bear trend in last Fri's Technical Blog if/when the market failed below a short-term risk parameter defined by 16-May's 1975 smaller-degree corrective low. The 240-min chart below shows overnight's failure below 1975 that defines 18-May's 2088 high as the END of the rally from 03-May's 1772 orthodox low and start of at least a steeper correction of this month's 1772 - 2088 rally OR a resumption of the secular bear trend to new lows below 1772.

As a direct result of this bearish divergence in short-term momentum the market has identified last week's 2088 high as our new short-term risk parameter from which non-bullish decisions like long-covers and cautious bearish punts can now be objectively based and managed.

Cocoa 240 min Chart

Cocoa Daily Chart

As recently discussed, the fundamental and technical forces that have driven the secular bear trend from Dec'15's 3429 high are not going to evaporate quickly, but rather over time in which the bear trend typically slows down before it reverses in any sustained way. Such a slowdown PROCESS includes at least a corrective retest of the low and possibly another round of new lows that the market fails to sustain.

In the weekly log scale chart below we have labeled Apr's 1756 low as the POSSIBLE end to a 5-wave Elliott sequence from Dec'15's 3429 low. Historically bearish sentiment levels not seen in at least five years and, in the case of the Bullish Consensus (marketvane.net), nearly 17 YEARS are typical of major base/reversal environments. However, the market has yet to satisfy our three reversal requirements:

  • a confirmed bullish divergence in momentum on a scale sufficient to break the secular bear trend
  • proof of impulsive, 5-wave behavior on the initial rally attempt (this requirement MAY have been satisfied) and, most importantly,
  • proof of 3-wave, corrective behavior on a subsequent relapse attempt.

Because these reversal requirements have yet to be satisfied, it would be premature to ignore the prospect that this month's 1772 - 2088 pop is just another bear market correction ahead of a resumption of the secular bear to new lows below 1772. IF IF IF this month's rally IS THE 1st-Wave of a new and major correction or reversal higher, then by definition the current relapse will need to stop somewhere north of 1772 in a confirmed bullish divergence in short-term momentum. If such a shorter-term mo failure stems the slide and defines a more reliable low, the risk/reward merits of a cautious bullish punt from that condition may be tremendous.

Cocoa Weekly Chart

Finally and also contributing to a major base/reversal threat, the decline from Dec'15's 3429 high is virtually identical in scope (i.e. 1.000 progression) to 2011's preceding 3775 - 1983 plunge. Amidst historically bearish sentiment and waning downside momentum on a weekly basis (above), it's not hard at all to find technical elements typical of major base/reversal conditions. But again, given the magnitude of the secular bear tend and the commensurate time it typically takes to reverse such a bear, we believe there is plenty of time and requirements to be satisfied before a shift to a new bullish policy can be considered appropriate and objective.

In the meantime and on an intermediate-term scale, today's failure below 1975 stems this month's rally and exposes at least a correction of the 1772 - 2088 rally that may be extensive in terms of price and time, and very possibly a resumption of the secular bear to new lows below 1772. The important by-product of today's mo failure is the market's definition of 18-May's 2088 high as THE high and short-term risk parameter the market now is required to recoup to negate this count and resurrect a major base/reversal count. In lieu of such 2088+ strength we anticipate further weakness to levels below the (1887) 61.8% retrace of this month's 1772 - 2088 rally and possibly a resumption of the secular bear to new lows below 1772.

Cocoa Monthly Chart

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