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S-T Cotton Failure Stirs Up Correction-vs-Reversal Debate

Posted 07/24/2019 12:52PM CT | RJO Market Insights

The market’s recovery this morning above 15-Jul’s 64.09 minor corrective high confirms a bullish divergence in short-term momentum shown in the 240-min chart below.  This mo failure confirms 18-Jul’s 61.66 low as the END of a textbook 5-wave Elliott sequence down from 01-Jul’s 68.35 high and our new short-term risk parameter from which shorter-term traders with tighter risk profiles can objectively base non-bearish decisions like short-covers and cautious bullish punts.

Taking a step bac to consider the past week’s recovery relative to the past quarter’s collapse, the daily log chart above shows that the market remains below a good amount of former support from the 64.70-to-65.50-area that would be fully expected to hold as new resistance if the market is still truly weak down here and still requiring a bearish policy.  Commensurately larger-degree strength above 01-Jul’s 68.35 next larger-degree corrective high and our key risk parameter remains required to break the long-term downtrend.  But waning downside momentum on a weekly basis below amidst the lowest, most pessimistic levels in our RJO Bullish Sentiment Index in nearly 13 YEARS warn us to beware a base/reversal count that could be major in scope.

The next reinforcing evidence of a larger-degree correction or reversal higher will come from proof of strength above the 65.50-area, with a recovery above 68.35 confirming the deal.  IF the past week’s recovery attempt is merely another interim corrective hiccup, we would expect a recovery-countering bearish divergence in short-term mo from the 64.70-to-65.50-range.

Finally, traders are reminded that from a very long-term perspective, the monthly log chart below shows the recent descent to the lower-quarter of the past 7-year lateral range where a continued bearish policy becomes an increasingly slippery slope given how skewed the huddled masses are to the bear side.  Such a bearish skew is quite OK and can sustain itself indefinitely as long as the market also sustains its simple downtrend pattern of lower lows and lower highs.   Its failure to do so, first above the 65.50-area and certainly above 68.35, will combine with these historically bearish sentiment/contrary opinion levels to present a base/correction/reversal environment that would be sure to surprise the masses.

These issues considered, shorter-term traders are advised to move to a neutral/sideline position as a result of today’s bullish divergence in momentum.  A cautious bullish policy will be advised if the market proves corrective behavior on a retest of last week’s 61.66.  Long-term players are advised to pare bearish exposure to more conservative levels, pare down still more above 65.50 and jettison the position altogether on a recovery above 68.35.  Needless to say, a relapse below 61.66 mitigates any base/reversal count and reinstates the major bear trend ahead of potentially steep losses thereafter.

RJO Market Insights