Over the past year we’ve been watching Cotton build a very impressive base that could create a major bottom. The old saying is, “The bigger the base, the higher in space”. The reason for this is that the longer it takes for supply and demand to work together to reverse a trend, the more powerful the ensuing trend becomes. From huge bases we see longer than average trends created. A great example of this recently is in $USDCAD – look at the size of this base, and then look what happened. The best example of this I can find today is in Cotton.
Here is a daily chart of Cotton futures going back to last year. If prices can start to break out above this overhead supply near $68, I would expect a very powerful move higher:
The interesting thing here is that this area around $68 is even more important if you take a step back and look back a little bit further. Here is a weekly chart of Cotton where we can see that this overhead supply from over the past year was former support back in early 2010 and again in the summer of 2012. Potentially, this can be an epic failed breakdown. From failed moves, tend to come really fast moves in the opposite direction. In this case, higher.
Also notice how clean the downtrend line is from the 2011 highs. We’re right there. A simultaneous breakout above this overhead supply and downtrend line from 2011 should be the catalyst for a major move higher. We want to be aggressive buyers above and only above those levels.
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Tags: $BAL $CT_F