Cotton Ready To Climb

01/05/06 07:39:13 AM

by Arthur Hill

NYBOT cotton has formed an ascending triangle, and a resistance challenge looks imminent.

Security: CL.1
Position: Accumulate

Figure 1, a continuous futures chart for NYBOT No. 2 cotton, shows that prices surged at the beginning of 2005 and then consolidated for the rest of the year. Cotton advanced from 42.4 to 57.59 (January-April) and then pulled back to 46.1 in early June. Despite two more rally attempts, cotton stalled at 58 in July and October. Cotton has essentially gone nowhere the last nine to 10 months.

FIGURE 1: NYBOT COTTON. Prices surged at the beginning of 2005 before eventually stalling.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

Even though cotton failed to break resistance at 58 twice and traded flat most of 2005, a bullish continuation pattern formed over the last six to seven months. Note the higher lows in August and November (green arrows). When combined with the equal highs, an ascending triangle formed and a break above 58 would have signaled a continuation higher. The equal highs represented overhead supply and selling pressure. The higher lows showed shallower dips as buying pressure came in at higher prices. The pattern would be confirmed with a break above the resistance highs.

Cotton started 2006 off with a bang and broke above its November and December highs. This solidifies the last reaction low, and the next challenge is ascending triangle resistance. A break above this level would project further strength toward 69-70. The width of the pattern is added to the breakout for an upside target (57.8 - 46.1 = 11.7, 57.8 = 11.7 = 69.5). A move below the lower trendline and December low (51) would question the validity of this pattern.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Cotton Ready To Climb

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