Working Money magazine.  The investors' magazine.
Traders.com Advantage

INDICATORS LIST


LIST OF TOPICS





Article Archive | Search | Subscribe/Renew | Login | Free Trial | Forgot ID?


PRINT THIS ARTICLE

REVERSAL


Divergences In Cotton

06/02/06 09:31:50 AM
by David Penn

It's summertime. Do positive divergences in the stochastic and moving average convergence/divergence histogram mean that cotton will be high this year?

Security:   CTN6
Position:   N/A

In a recent article, I looked at the long- and intermediate-term picture for cotton in an article for Traders.com Advantage ("Cotton's Come Up(pance)," June 2, 2006). In the article, I suggested a number of things: (a) that cotton was in a secular bull market from the mid-1960s until 1995; (b) that cotton remains in the secular bear market that began approximately 10 years ago; and (c) that cotton's secular bear market will be confirmed if the lows of late 2004—at roughly 42 cents—are taken out to the downside.

FIGURE 1: JULY COTTON FUTURES, DAILY. The short-term bounce in cotton futures sends the market on a likely collision course with both the 38.2% Fibonacci retracement level and a major downtrend line from the February highs.
Graphic provided by: Prophet Financial, Inc.
 
The price action shown in Figure 1 represents the cotton market's break below a trendline that extends from the lows of late 2004 mentioned previously. The specific break occurred at approximately 54 cents. Figure 1 also points out the degree to which cotton has begun to retrace some of its decline from the 59-cent area. Putting in a low in late May, July cotton has managed to retrace more than 25% but still not yet a Fibonacci 38.2% level. Interestingly, the 38.2% Fibonacci retracement level coincides almost perfectly with the downtrend line from the highs near the beginning of the year.

Cotton has yet to put in a higher low, so for all intents and purposes, the market remains bearish on the short term. Given the consolidation between 52 and 49 cents from latest April to latest May, a trader looking to buy cotton could use Stan Weinstein's swing rule to project a rally to the 55-cent area (width of consolidation added to value at top of consolidation). And I suspect it is no coincidence that the 55-cent area is only about half a cent away from another Fibonacci retracement level, the 61.8% retracement.

FIGURE 2: JULY COTTON FUTURES, DAILY. Positive divergences in both the stochastic and the MACD histogram anticipated the bounce in July cotton—and the test of the downtrend line from early in the year.
Graphic provided by: Prophet Financial, Inc.
 
Additional evidence in support of a move higher in the near term comes in the form of a pair of mutually confirming positive divergences in the stochastics and in the MACD histogram. These divergences are ideally spaced, their higher lows from late April to late May matching the lower lows in price over the same period. In fact, CTN6 has already confirmed the positive divergences by rallying to a closing high above the high of the initial low (late April)—essentially, a breakout above 52.

There is plenty of resistance for July cotton to deal with. As Figure 2 shows, there is a 50-day exponential moving average (in blue), and the trendline from the February highs. Both of these potential resistance levels only add to the potential for resistance at the 38.2% Fibonacci retracement level.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

Title: Technical Writer
Company: Technical Analysis, Inc.
Address: 4757 California Avenue SW
Seattle, WA 98116
Phone # for sales: 206 938 0570
Fax: 206 938 1307
Website: www.Traders.com
E-mail address: DPenn@traders.com

Traders' Resource Links
Charting the Stock Market: The Wyckoff Method -- Books
Working-Money.com -- Online Trading Services
Traders.com Advantage -- Online Trading Services
Technical Analysis of Stocks & Commodities -- Publications and Newsletters
Working Money, at Working-Money.com -- Publications and Newsletters
Traders.com Advantage -- Publications and Newsletters
Professional Traders Starter Kit -- Software

Click here for more information about our publications!


Comments or Questions? Article Usefulness
5 (most useful)
4
3
2
1 (least useful)

Comments

Date: 06/02/06Rank: 3Comment: 
Date: 06/06/06Rank: 5Comment: 
Date: 06/13/06Rank: 5Comment: 
PRINT THIS ARTICLE






S&C Subscription/Renewal




Request Information From Our Sponsors 

DEPARTMENTS: Advertising | Editorial | Circulation | Contact Us | BY PHONE: (206) 938-0570

PTSK — The Professional Traders' Starter Kit
Home — S&C Magazine | Working Money Magazine | Traders.com Advantage | Online Store | Traders’ Resource
Add a Product to Traders’ Resource | Message Boards | Subscribe/Renew | Free Trial Issue | Article Code | Search

Copyright © 1982–2024 Technical Analysis, Inc. All rights reserved. Read our disclaimer & privacy statement.