Momentum, Sentiment Conspire Against Cotton Bull, But Premature to Conclude Top

June 18, 2018 9:39AM CDT

In last Mon's Technical Blog we identified 06-Jun's 89.35 corrective low as the short-term risk parameter this market needed to sustain gains above to avoid confirming a bearish divergence in momentum that would threaten a more immediate bullish count. The daily log scale chart below shows overnight's failure below this level that breaks at least the intermediate-term uptrend and defines 11-Jun's 96.50 high as one of developing importance and our new short-term risk parameter from which non-bullish decisions like long-covers and cautious bearish punts can now be objectively based by shorter-term traders with tighter risk profiles.
Cotton Jul '18 Daily Chart
From a longer-term perspective however, this mo failure is of an insufficient scale thus far to threaten the major uptrend shown in the weekly log close-only chart below. Historically frothy levels in our RJO Bullish Sentiment Index- the highest in over seven years- are certainly typical of major peak/reversal conditions and should be a focus of anyone's analysis in the period immediately ahead as a result of today's bearish divergence in momentum. But only a glance at the daily chart above is needed to see that the past week's setback could also easily be an interim (4th-Wave) correction within the major bull to at least one more round of new highs above 96.50.

IF the past week's break is the start of a more prolific peak/reversal environment, the market is required to satisfy the crucial third of our three reversal requirements in the period ahead following (1) a bearish divergence in mo and (2) arguably impulsive behavior on the initial counter-trend sell-off attempt. This third requirement is proof of 3-wave, labored, corrective behavior on a subsequent recovery attempt that falls short of breaking last week's 96.50 high. Upon such proof or a commensurately larger-degree mo failure below 15-May's 83.36 next larger-degree corrective, even long-term players would be advised to move to a new bearish policy.

These issues considered, shorter-term traders have been advised to move to a neutral/sideline. Longer-term players are OK to pare bullish exposure to more conservative levels but to still required a failure below 83.36 to negate a bullish count altogether and move to the sidelines. We will be watchful for proof of 3-wave, corrective behavior on a recovery attempt in the weeks ahead and a stemming bearish divergence in momentum to move to a bearish policy.

Cotton Weekly Chart

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