This Base in Cotton Looks Ready To Go

This has so far been the year for agricultural commodities. If you’ve been in this space and stayed away from the US stock market, you’ve been doing great. Good for you. But either way, I think Cotton is worth taking a look at. This nice long base we’ve seen Cotton build over the last few years could be the catalyst to take this much higher. Some of it’s colleagues like Coffee, for example, have been on fire. I think this one can join the party.

The first chart shows a nice big base developing over the past few years. After an asset crashes like Cotton did in 2011, the only medicine is time (i.e. Tech after 2000). This base is exactly what was needed:

4-22-14 ct weekly

Now with those key resistance levels in mind, let’s call it 94-ish, take a look at this daily line chart. This is where we’ve been running into trouble for some time. But as always, the more times that a level is tested, the higher the likelihood that it breaks. This is the 4th test in a little over a year and 5th since 2012.

4-22-14 ct daily

Look at momentum. When prices got down to their May lows and found support at that former downtrend line from 2012, RSI was already turning up. That bullish divergence helped prices bounce off support and rally back towards this key resistance. On any pull backs this year, momentum has held in very bullish mode. We like that.

Price target-wise I don’t think we can just assume that it will do what Coffee just did: up over 100% in a few months. But I do think there’s plenty of upside. The fact that this space is and has been the best place to be in the entire world this year, we have the wind to our backs. A fair initial target would be up towards 112-115, which represents the measured move from the size of the base as well as the late 2011 highs. That’s still over 20% away from current prices.

But truthfully, based on the flow going into this space lately and the size of this base, I don’t see why we can’t see prices up towards 140-160, which is the 61.8% Fibonacci retracement from the 2011 crash as well as a bunch of that churning that took place in 2011. You can see it better in the weekly chart above.

As far as the risk management is concerned, it’s hard for me to be long right here because the risk isn’t very well-defined. I would prefer to be long above and only above this resistance. It just seems cleaner to me.

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Tags: $CT_F $BAL $KC_F $JO $DBA