Have you seen this latest article at CNBC about Cotton prices? It’s an interesting read. Now that we know some of the fundamental concerns, let us look at the charts. Usually, price action likes to stick relatively close to its 34 EMA. Until it runs too far away from it and goes parabolic. That’s what happened in late 2010 into early 2011. Also notice how violent prices fell back down once the run-up ran its course. Lesson: be careful chasing these types of moves.
Now that we have reviewed previous history, let’s move on to the now. The weekly chart shows an ABCD pattern with shallow retracement, which signals a strong trend. However, the left-handed skewing (4 weeks to 27 weeks) that triggered it showed a lack of upside momentum. But that all changed in late September with this recent surge higher. The two big questions now become: how high can prices go? and is it too late to be a buyer? Let’s tackle the first question. The weekly ABCD pattern suggests a minimum upside target of 124.37 to 125.50, which is its 100% projection and 261% extension. Above that is a weekly consolidation zone between 142.29 and 168.49 that occurred on the run down from its 2011 peak. This zone also contains the weekly ABCD’s 361% and 461% extensions.
Now that we have some upside targets available let us move on to the second question. Are we too late to enter? My favorite tools to use for pullback entries are volume profile clusters, the 34 EMA wave, Fib symmetry retracements, and change of polarity areas (old resistance becomes new support). The volume profile clusters show zones around 105.90 to 103.30, and 99.90 to 97.40. The 34 EMA wave currently sits around 100.06 to 97.16, but will change as price action moves. Fib symmetry retracements occur at 108.72, 106.59, and 98.00. Finally, change of polarity comes in from 96.71 to 95.60. Putting all of these areas together, I like the 100.06 to 95.60 zone for a potential buy. However, it’s likely that with a sudden upwards burst like we’ve seen that we won’t get a pullback of this nature. Therefore, the other zone to watch closely will be between 106.59 and 103.33.
Two last things worth mentioning are COT positions and seasonality. First, large traders are currently long at 192 week extremes and commercials are currently short at 238 week extremes. Be mindful as this can become an overcrowded trade quickly. Second, Cotton tends to see late October into late November weakness (possibly giving us our buy entry) before a surge higher that can last into late January to mid March.
Just remember, trading moves like this isn’t for the feint of heart. This market’s ATR has doubled over the past couple weeks. Be prepared for continued volatility ahead.