S-T Mo Failure Stems Cotton Break, But Suspected Rebound Approach as Corrective

February 2, 2018 8:06AM CST

The market's failure yesterday to sustain late-Jan's losses below 30-Jan's 78.93 corrective high and short-term risk parameter discussed in Wed's Technical Blog confirms a bullish divergence in short-term momentum that defines Wed's 76.52 low as the END of a 5-wave decline from 22-Jan's 83.95 low. This combination of factors identifies that 76.52 low as our new short-term risk parameter from which non-bearish decisions like short-covers and cautious bullish scalps can be objectively based and managed ahead of what we suspect will be only an interim correction of the late-Jan's slide within a broader PEAK/reversal process.

After such a strong Oct-Jan rally, the fundamental and technical drivers of which are unlikely to evaporate quickly, it is not uncommon for such (b- or 2nd-wave or right-shoulder) corrective rebuttals to be extensive in terms of price and/or time. Per such, we'd estimate a 61.8%ish retracement to the lower-81-handle or above to be watchful for the requisite bearish divergence in momentum required to stem what would be a shorter-term uptrend and next reinforcing factor to a broader peak/reversal process.

Needless to say a recovery above 22-Jan's 83.95 high and long-term risk parameter is needed to negate this peak/reversal threat and reinstate the major bull while a relapse below our short-term risk parameter at 76.52 will mitigate this call for a corrective rebound and leave the market vulnerable to sharp losses.
cotton_mar18_240min_chart
cotton_mar18_daily_chart
The daily close-only chart above shows a textbook 5-wave rally from 20-Oct's 66.77 low to 19-Jan's 83.42 high as a result of 30-Jan's bearish divergence in momentum below 02-Jan's 77.50 corrective low that, in fact, broke the uptrend. Critically, this confirmed bearish divergence in momentum renders market sentiment/contrary opinion an applicable technical tool. And the current frothy 93% bullish level in our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC is considered fuel for downside vulnerability that could be as extensive as Oct-Jan's rally was.

This said, the magnitude of Oct-Jan's rally is not to be underestimated just yet considering that the market has thus far only satisfied two of our three reversal requirements (momentum failure and impulsive behavior down). Indeed, thus far the market has only retraced a Fibonacci minimum 38.2% of Oct-Jan's 66.77 - 83.42 rally to the 77.06-area shown above. Per such we cannot ignore an alternate count that contends the recent swoon isn't "just" a correction within the past TWO YEAR major uptrend.

So here's where our critical third reversal requirement comes in. IF IF the recent break is just the INITIAL (A- or 1st-wave) break of something bigger to the bear side, then it stands to reason that recovery attempts unfold in a 3-wave, corrective manner and fall shy of 22-Jan's 83.95 high and key risk parameter. This is the basis for our expectation and requirement of a recovery attempt to, say, 81.00-area OB that's stemmed by a bearish divergence in momentum. ON the heels of the recent price action and road map discussed above, such a mo failure on a recovery attempt that fails to take on 22-Jan's high may provide an outstanding risk/reward opportunity from the bear side.

These issues considered, shorter-term traders are OK to actually approach this market from a cautious bullish perspective on setback attempts to the 77.75-area OB with protective sell-stops below 76.52 in an attempt to play for that corrective rebound that may be relatively sharp. Longer-term players remain advised to maintain a neutral/sideline policy ahead of an anticipated rebound to 81.00 OB for a preferred risk/reward selling opportunity following a bearish divergence in momentum.

cotton_mar18_weekly_chart

RJO Futures | 222 South Riverside Plaza, Suite 1200 | Chicago, Illinois 60606 | United States
800.441.1616 | 312.373.5478

The risk of trading futures and options can be substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that RJO Futures believes to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgement at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

This material has been prepared by a sales or trading employee or agent of RJO Futures and is, or is in the nature of, a solicitation. This material is not a research report prepared by RJO Futures Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

Distribution in some jurisdictions may be prohibited or restricted by law. Persons in possession of this communication indirectly should inform themselves about and observe any such prohibition or restrictions. To the extent that you have received this communication indirectly and solicitations are prohibited in your jurisdiction with registration, the market commentary in this communication should not be considered a solicitation.