A trade in my office who does a lot of agricultural hedge business called me a few hours ago to ask me what happened in cotton futures today. For most of the morning it had been trading around unchanged; then collapsed. I haven’t looked for new on cotton today, but the chart certainly tells us what happened technically.
I’ve been commenting on the 6500 area for December cotton futures for the past month. It made a high at 64.98 on 7/21 (point 1) then proceeded to break eight cents, or $4000, in about a week.
From that low it rallied back to the 65 cent area on 8/13 (point 2). That day saw a failed rally-it was unable to maintain a rally over 6500, and closed back around the open. This failure led to a second selloff, which exceeded the first.
The most recent rally started with a breakout buy on 8/27 (for more on breakout trading go here). For the past week cotton has been volatile. The big break and reversal (a two bar reversal pattern) is normally a bullish pattern, but Wednesday and Thursday saw it continue to bump against resistance.
A triple top
Today was a good example of what can happen when a breakout attempt fails. On this morning’s STI morning watch list I wrote:
Dec. Cotton: With the way the 65.00 area has served as a ceiling, there will probably be a lot of buying pressure if it’s taken out. Is today the day they do so, and can it stay over?
Below is a 10 minute chart for Dec. Cotton for today. The early morning low was 64.55; it then rallied to the day’s high of 65.39. One way to trade a failed breakout such as this would have been to sell short when the day’s low at 64.55 was broken.
red line=previous low
What’s next for cotton? During the last break, the second day of the selloff was still relatively large; maybe this will do the same. I’d see a next downside price objective of 62.10, which is a 50% retracement of the last rally. A move symmetrical to the lat break would take it back to 57.00.
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