Sentiment, Momentum, Waves, Fibs Conspire Against Cotton Market

July 23, 2018 8:44AM CDT

While the market has yet to break 11-Jul's 84.34 low and short-term risk parameter discussed in 13-Jul's Technical Blog, Fri's break below 13-Jul's 86.70 initial counter-trend low confirms a bearish divergence in short-term momentum as shown in the 240-min chart below. While this is a pretty nondescript event from the middle of the past month-and-a-half's range, it could have significant bearish implications in the weeks or even months immediately ahead given a host of other peak/reversal-threat evidence.

An important by-product of Fri's sub-86.70 slip is the market's definition of 18-Jul's 88.80 high as the latest smaller-degree corrective high and new short-term risk parameter from which shorter-term traders with tighter risk profiles can objectively base and managed a resumed bearish policy.
Cotton Dec '18 240min Chart

Fri's nondescript mo failure is also important because it:

• stems from a pair of Fibonacci retracement and progression relationships (at 89.00 and 89.83) and
• exposes the recovery attempt from 06-Jul's 81.75 low as a 3-wave affair as labeled in the 240-min chart above.

Left unaltered by a recovery above at least 88.80, this 3-wave recovery attempt is considered a corrective structure consistent with our longer-term peak/reversal count stemming from the extent and impulsiveness of Jun-Jul's 94.82 - 81.75 decline shown in the daily log scale chart below. This long-term bearish count contends that 08-Jun's 94.82 high and key risk parameter COMPLETED the C- or 3rd-Wave of the year-long rally from Jun'17's 65.80 low and exposes a major (4th-Wave) correction OR reversal lower.
Cotton Dec '18 Daily Chart

The weekly log scale chart of the Dec contract below shows the suspected completion of the past year's rally following a bearish divergence in momentum. But the real coup de gras is the extraordinarily frothy bullish sentiment typical of major peak/reversal environments. Indeed, at a whopping 97% reflecting 84K longs to just 3K shorts as of Fri's update, our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC is at its highest level since Feb 2011.

This contrary opinion indicator would not matter one lick IF the bull trend was still intact. But this market has not only confirmed a bearish divergence in WEEKLY momentum with Jun-Jul's decline (the first of our three reversal requirements), that decline looked to be trendy, impulsive, 5-wave affair that satisfied the second of our three reversal requirements. As a result of Fri's sub-86.70 failure, early-Jul's recovery attempt looks to be a 3-wave, corrective event. This satisfies the third of our three reversal requirements that we believe now leaves the market prone to a major C- or 3rd-Wave down to levels potentially well below 06-Jul's 81.75 initial counter-trend low. Strength above at least 88.80 is required to negate this specific bearish count.

These issues considered, long-term players remain advised to maintain a bearish policy with strength above 88.80 required to pare this exposure to more conservative levels and subsequent strength above 94.82 to jettison the position altogether. Shorter-term traders advised to move to a neutral-to-cautious-bullish position following 10-Jul's bullish divergence in short-term are now advised to move to a resumed bearish policy at-the-market (86.53) with a recovery above 88.80 required to negate this call and warrant its cover. In lieu of such 88.80+ strength we anticipate further and potentially protracted weakness that could span weeks or even months.

Cotton Dec '18 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.