Mo Failure Arrests Cotton Bear, Exposes Rebound

This morning’s recovery above both 20-Jul’s 94.85 initial counter-trend high and 11-Jul’s 96.69 corrective high and our short-term but key bear risk parameter discussed in 13-Jul’s Technical Blog confirms a bullish divergence in daily momentum.  This momentum failure defines 15-Jul’s 82.54 low as one of obvious developing importance and also Mon’s 89.50 low as the latest smaller-degree corrective low.  Per such, these levels serve as our new long- and short-term risk parameters from which non-bearish decisions like short-covers and cautious bullish punts can now be objectively based and managed.

Former 93.50-to-94.85-area resistance from last week is now considered new near-term support per any more immediate bullish count.  A failure below 89.50 will raise the odds that the past couple weeks’ recovery attempt is just a 3-wave and thus corrective affair and re-expose May-Jul’s broader bear trend.  Until such weakness is proven, further and possibly protracted gains are expected.

The daily log scale chart above shows the bullish divergence in momentum resulting from this morning’s recovery above 96.69 as well as what is arguably a textbook complete 5-wave Elliott sequence down from 17-May’s 133.79 high.  We’ve marked the 38.2%, 50% and 61.8% retraces of May-Jul’s 133.79 – 82.54 decline for “general guideline” purposes.  These merely “derived” levels are NOT considered resistance, but rather only areas “of interest” around which to be watchful for a recovery-stemming bearish divergence in momentum that might provide early warning of the (suspected 2nd-Wave) correction’s end.  In lieu of such a bearish divergence in momentum, the market’s upside potential is is advised to be approached as indeterminable and potentially severe given the market’s quick 47% collapse from 04-May’s 155.95 high on a weekly log active-continuation basis (below) following a massive TWO-YEAR secular bull trend.

The Bullish Consensus ( measure of market sentiment/contrary opinion has understandably eased to a more neutral 59% area that won’t inhibit a move either way.  But our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC remains relatively frothy at 81% reflecting over 45K long positions to just 11K shorts, so this indicator still reflects some vulnerability to LOWER prices.  Herein lies the importance of the bull risk parameters identified at 89.50 and especially 82.54.

These issues considered, traders have been advised to take profits on previously recommended bearish policy following today’s recovery above 96.69 and are further advised to move to a cautious bullish stance on a setback to the 94.00-area OB with a failure below 89.50 required to negate this specific call and warrant its cover.  In lieu of weakness below at least 89.50, further and possibly protracted gains are anticipated that could span weeks.

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