cotton – Andrew Thrasher

For my piece for TraderPlanet I take look at cotton ($BAL). It’s been sliding over the last few months, but is now sitting on support with oversold momentum.

Here’s a blurb:

Looking at the iPath Cotton ETF ($BAL), we can see cotton is just about flat on the year while the PowerShares Multi-Sector Agriculture ETF (DBA) is off nearly 9%. However, it hasn’t been all roses and sunshine for cotton this year.

I wrote a post on my blog in March titled “Are the Sheep About to Get Sheared in Cotton?” – noting the bearish candlestick pattern as well as the fact that the commodity was up against a falling trend line didn’t bode well for further price appreciation. Going forward resistance held and $BAL fell 16% through Friday.

The trend for cotton is still down, and there isn’t enough evidence to say that’s reversing. However, we could still see some kind of bounce.

Source: Commodities: Is Cotton Due For a Bounce? (TraderPlanet)

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I haven’t been seeing much to talk about in the equity space lately, so we are going to spend some more time looking at commodities today – specifically cotton. After the iPath Cotton ETF (BAL) topped in early 2011 it fell over 80% before bottoming in June of last year. Once all the sellers were shaken out, the commodity has seen a nice rally up to the $60 area.

Lucky for Fruit of the Loom and Hanes, it appears cotton has hit a wall. $BAL ran into the falling trend line created from the high of two years ago. Ideally we would prefer to see another previous test of the trend line to have more faith that it will hold as resistance, but we can use other methods of technical analysis to better understand if cotton can continue its advance or will correct.

While it’s not very easy to see on the chart below, $BAL has created an island pattern over the last three trading days. This means the cotton ETF gaped up and closed above the previous day’s high and then the next day gaped and closed down below the previous day’s low. You can see why they call this an island pattern – the gaps separate the bar/candle as if it were an island. This is a bearish pattern when it occurs in an uptrend. However since the island in $BAL just involves a single bar rather than a cluster of trading days it is not a strong bearish pattern and is often viewed more short-term than other trading patterns.

When we turn our attention to the COT data, the ‘smart money’ is currently holding a historically large short position in cotton. They are actually the most net-short they’ve been in the last three years. This gives a little more credence that cotton could experience further weakness going forward. What $BAL bears will likely be looking for is to fill the gap below $75.50 and possibly test the short-term low of $52.50. On the upside we will see if the falling trend line holds or if bulls can bust through.