This week’s continued slide below Fri’s 78.42 low leaves ri afternoon’s 79.50 high in its wake as a very minor corrective high the market is now required to sustain losses below to maintain the past week’s intermediate-term downtrend. Its failure to do so will confirm a bullish divergence in momentum, break the downtrend from 15-May’s 87.18 high and expose at least a steeper correction of this decline and possibly a resumption of the secular bull to new highs above 87.18. For reasons we’ll discuss below this admittedly very tight risk parameter at 79.50 could come in very handy in navigating what has become a major PEAK/reversal-threat environment.

Cotton 60 min Chart

The 240-min chart below shows the market’s encroachment on 11-May’s 76.17 larger-degree corrective low and key risk parameter the market is still required to break to break the long-term uptrend and expose a major correction or reversal lower. If there’s a place and time for the past week’s impressive relapse to bottom, we believe it is here and now. And we will gauge such a base/reversal around the market’s ability to recoup Fri’s 79.50 minor corrective high.

Cotton 240 min Chart

Cotton Daily Chart

The extent and impulsiveness of the past week’s decline and gross failure to sustain 12-May’s breakout above a ton of former resistance from the 79.75-to-80.25-range that SHOULD HAVE HELD as new support if the market was still truly strong “up here” is a clear indication of developing weakness and vulnerability. Because of the extent of this relapse we have re-labeled the wave count from 01Sep16’s 65.96 low in the daily log chart above that contends the 4th-Wave correction from 06-Mar’s 80.27 high ended with 11-May’s 76.17 low. This count then allows for the gasp from that 76.17 low to 15-May’s 87.18 high as the completing 5th-Wave of the sequence that now warns of a peak/reversal environment that could be major in scope.

As the market has thus far failed to break 11-May’s 76.17 corrective low and key risk parameter however, it would be premature to conclude such a major reversal lower at this time. Additionally, the market has, at best, satisfied only one of our three reversal requirements, that being proof of 5-wave, impulsive behavior down. The market has yet to confirm a bearish divergence in momentum below a prior corrective low or below an initial counter-trend low on a scale sufficient to break the long-term uptrend nor has it provided proof of a labored, 3-wave corrective recovery attempt. If the market can confirm a bullish divergence in short-term mo above 79.50, it will have the opportunity to either resume the secular bull trend OR labor in its recovery attempt that will contribute to a major peak/reversal threat.

Cotton Daily Chart

Cotton Weekly Chart

Indeed, when the market peaked in Mar 2014, the weekly log active-continuation chart above shows that its first two weeks’ slide gave way to an extensive 3-week corrective retest of the high before the market went blotto. Interestingly, the current whopping 94% reading in our RJO Bullish Sentiment Index is the same as that that warned of and accompanied that major peak/reversal environment three years ago and is considered a major contributing factor to a peak/reversal environment now. The prospect for such a collapse will be heightened if/when the market break 11-May’s 76.17 low. In lieu of such sub-76.17 weakness and especially if the market can recover above 79,50, traders should be aware of the likelihood of what could be an extensive corrective rebound or resumption of the secular bull. Following proof of 3-wave corrective behavior above 79.50 that ultimately is stemmed by a bearish divergence in short-term momentum, an outstanding risk/reward selling opportunity may be presented.

These issues considered, long-term players remain OK to maintain a cautious bullish policy with a failure below 76.17 required to move immediately to a neutral/sideline position in order to circumvent the depths unknown of a major correction or reversal lower. Shorter-term traders with tighter risk profiles are OK to maintain a cautious bearish stance with a recovery above 79.50 required to negate this call and expose a steeper recovery or resumed bull. In effect, we believe the market has identified 79.50 and 76.17 as the key directional triggers heading forward.

Cotton Weekly Chart

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.
For more information on RJO Market Insights, contact your broker or RJO representative.