We introduced the prospect of a major peak/reversal-threat environment in 29Nov21 Technical Blog following 26-Nov’s bearish divergence in daily momentum.  This threat received reinforcing evidence from the subsequent sharp, impulsive 5-wave decline to 02-Dec’s 102.50 low that confirmed a bearish divergence in WEEKLY momentum.  Combined with historically stratospheric bullish sentiment typical of major peak/reversal environments, the stage seemed to be set for a major peak/reversal process.

In 06-Dec’s Technical Blog however, we warned of a potentially extensive corrective rebuttal to mid-Nov-to-early-Dec’s suspected initial A- or 1st-Wave decline typical of such major peak/reversal processes, especially given the magnitude of the secular bull trend from Apr’20’s 48.35 low.  After satisfying the first two of our three key reversal requirements of 1) a confirmed bearish divergence in momentum and 2) proof of trendy, impulsive 5-wave behavior down, this expected 3-wave corrective rebuttal and bearish divergence in momentum needed to stem the rebound was required to satisfy the key third of our three reversal requirements.  Only a glance at the 240-min chart below is needed to see that such a recovery-stemming bearish divergence in short-term momentum has yet to materialize, preventing the initiation of a new bearish policy.

This key third reversal requirement is intended to protect against establishing a bearish policy too early or the entire peak/reversal count being just plain wrong.  With the Mar contract just a stone’s throw away from its 17-Nov high of 118.50 and key long-term risk parameter the market needs to recoup to negate this specific peak/reversal count, this key third reversal requirement is working beautifully for its intended purpose of deferring or negating a new bearish policy.  As a result of this week’s continued rebound and break above last week’s 115.33 high, the market has defined 31-Dec’s 112.36 low as the latest smaller-degree corrective low and new short-term risk parameter the market is required to fail below to confirm the bearish divergence in short-term momentum needed to stem the recovery and define a more reliable high and resistance from which bearish punts can be objectively based and managed.  Until and unless such sub-112.36 weakness is shown, the past month’s uptrend remains intact and is expected to continue, including a resumption of the secular bull trend above 118.50.

The daily log scale chart of the Mar contract above and weekly log active-continuation chart below show the past month’s expected rebuttal to Nov-Dec’s decline.  Given the difference in 02-Nov’s highs- 118.50 in the Mar contract and 121.67 in the then-prompt Dec contract- the resumption of the secular bull trend will be debatable if the market breaks 118.50 but remains below 121.67.  What will remain clear however is that a new bearish policy and exposure will remain deferred until and unless the market fails below at least 112.36.  As for the market’s remaining upside potential until such a mo failure arrests the rally, above at least 118.50 and certainly 121.67 it will be considered indeterminable and potentially extreme.  Traders wanting to resume participation with the prospective bull are quite OK to do so with a failure below 112.36 required to negate this call and warrant its immediate cover-and-reversal.

With rightful regard to extraordinary bullish sentiment/contrary opinion levels typical of major peak/reversal environments, and especially the recent and current 100% level in our RJO Bullish Sentiment Index (RJOBSI) reflecting a whopping 74,996 Managed Money long positions against only 171 shorts, this factor remains a key factor in navigating a major top.  HOWEVER and especially given the extent and impulsiveness of the past month’s rebound, a confirmed bearish divergence in momentum remains required to render sentiment an applicable technical tool.

We have no doubt whatsoever that this factor warns of a peak/reversal outcome that will be major in scope, presenting a superb risk/reward selling opportunity that could span months or even quarters.  But until and unless the market arrests the clear and present uptrend from 02-Dec’s 102.50 low, the specific timing and, most importantly, risk associated with bearish exposure is unknown.  But we still find it interesting that the market remains around a 121.55-to-123.22 area marked by the 1.618 progression of 2016-18’s preceding 54.53 – 96.40 rally taken from Apr’20’s 48.35 low and the 1.8% retracement of 2011 – 2020’s entire 219.70 – 48.35 bear market on a monthly log scale basis below..  If we only had a bearish divergence in momentum needed to define a more acute high and risk parameter from which to objectively initiate bearish exposure.

Over decades and all of the commodities that we cover, we recall seeing a 100% reading in our RJOBSI only one other time:  in 3Q12 in soybean meal shown in the weekly log active-continuation chart below.  What’s pertinent about comparing the current cotton condition to that of 2012’s soybean meal market is that meal notched the unheard level of 100% Managed Money bullish exposure in early-Jul 2012 around 453.  That secular bull market took another TWO MONTHS and nearly $90-bucks (another 20% higher) before ultimately topping out.  Herein lies the crucial importance of requiring a bearish divergence in momentum needed to reject/define a more reliable high, resistance and risk parameter before initiating a new bearish policy and exposure in cotton.  Until such a mo failure arrests the rally from 2-Dec’s 102.50 low, further and possibly sharp gains should not surprise.  And per such, cautious bullish exposure is arguable, with a failure below 112.26 required to reverse into a new bearish policy that could be extraordinary.