RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

Overnight’s break above last week’s 74.28 high reaffirms the developing uptrend and leaves Tue’s 72.76 low in its wake as the latest smaller-degree corrective low the market is now minimally required to fail below to stem the rally, confirm a bearish divergence in momentum and expose at least an interim correction if not a broader reversal lower. In this regard we are considering 72.75 as our new short-term but key risk parameter from which a still-advised bullish policy and exposure can be objectively rebased and managed.
The uptrend is clear and present in the daily log scale chart below, with threats to the bull equally clear in the forms of:
• the developing POTENTIAL for a bearish divergence in momentum
• the market’s proximity to the extreme upper recesses of a range that has dominated price action for 16 months in the Mar contract and
• the prospect that the market is near the end of another 3-wave sequence up from 20-Oct’s 66.75 low similar to Jul-Sep’s preceding rally.

As with all clear trends the technical key is MOMENTUM, where a CONFIRMED failure below a recent corrective low like 72.76 is required to break the simple pattern of higher highs and higher lows and provide objective reason to conduct non-bullish decisions like long-covers and cautious bearish punts. Until and unless such sub-72.76 weakness is proven the trend is up and should not surprise by its continuance or acceleration, including a bust-out to indeterminable heights above the 75.50-to-75.75-area that defines the upper boundary of the key range that has constrained it for months.
The weekly chart of the Mar contract above shows its 20Mar17 high at 75.57 that marks the high to the range that has constrained it since Aug’16. On a weekly log active-continuation chart basis below, early-Sep’s 75.75 high in the then-prompt Dec17 contract defines a pivotal high. A break above this 75.57-to-75.75-area exposes an area totally void of any technical levels of merit shy of May’17’s 87.18 outlier. This doesn’t mean we’d forecast a move to 87 if the current bull breaks above 75.75, but it certainly would mean that ANY amount of upside thereafter is fair game- including a run at 87- until and unless the market confirms a bearish divergence in momentum. As this would require proof of weakness below a prior corrective low, our technical focus above 75.75 would pretty much remain the same as it is now: on PROOF of weakness/mo failure below a prior corrective low like 72.76.

Another bullet point that would contribute to a PEAK/reversal-threat environment if the market fails below 72.76 is the fact that our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC remains historically frothy at 92%. Such bullish froth is quite OK and can be sustained indefinitely as long as the market sustains its uptrend. The moment the uptrend is broken is the moment that greater risk comes to this very long exposure that often times results in the overall market forcing this community to capitulate, exacerbating the decline.
Finally, from a very long-term historical basis and especially as this market is engaging the extreme upper recesses of the past year’s range that we’ve defined above as pivotal, we’d also like to point out that this market remains deep, deep within the middle-half bowels of the past five years’ range of 97-to-54 on a monthly log scale basis. While the pendulum has temporarily swung outside this range, if history is any indication current prices are about as “fair value” as it gets.

Taking an even bigger step back to consider the past 45 years in the quarterly log scale chart below, this market has spent over 90% of its time between 99 and 42. the point of this historical trip is that with the exception of a couple outlier spikes this market has been one of the most boring, directionally-challenged commodities on earth.

The takeaway from this analysis is that aimless whipsaw risk should hardly come as a surprise to cotton traders. Indeed, miserable chop and failed new lows and highs should be expected. And this gets us back to the current uptrend that, frankly, has been an easy ride since 20-Nov’s breakout above the 69.46-area. As of this writing it should fully be expected to continue, and even to the next bust-out level above 75.75. BUT, recent corrective lows and risk parameters like 72.76 are also clear and provide an excellent and objective level and condition around which to manage the risk of a bullish count.

In sum, a bullish policy and exposure remain advised with a failure below 72.75 required to threaten this call enough to warrant its cover. In lieu of such sub-72.75 weakness further and possibly accelerated gains remain expected. The market’s upside potential remains indeterminable and potentially extreme (well, within the relative bounds of the past 45-year range 🙂 ).


RJO Market Insights

RJO Market Insights specializes in forward-thinking analysis, focused on potential market-moving events and dominant factors driving price discovery. Detailed fundamental and technical coverage across multiple commodity sectors is combined with objectively-constructed trade recommendations to provide an industry-leading product for R.J. O’Brien’s Institutional clients, commercial hedgers, introducing brokers and individual investors free of charge. Content is distributed in both text and audio formats, with specialized service offerings provided by account type.
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