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Since trading down to the December 2004 low of 41.72, Cotton (CT-SpotV) has been vibrating within a well defined sideways channel and has been confronted with very strong resistance around the 57 to 58 cent level. In fact, this market has broken through the 57 cent level seven times since December 2004 and only on one of these seven occasions did it break through the 58 cent level when it traded at 58.10 top.
Chart 1 below is a Daily Bar Chart showing the price movement of Cotton (CT-SpotV) from the December 2004 low. Extending an upward trend line from the low of 41.72 we can see that Cotton is currently trading around this trend line where we can most probably find some support. Support had previously been met along this same trend line in November 2006.
Looking at the Gann Retracement levels from the December 2004 low to the February 2006 top we can see that this current support level offered by the trend line is finding added support along the 50% retracement level.
Chart 1 – Cotton Daily Bar Chart
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For further analysis I have turned the focus onto the Daily Bar Chart for the July contract (CT-2007.N) in Chart 2 below. Looking at the Double Bottom we can see that after creating the second of the double bottoms the price of July Cotton rallied up only to find strong resistance at the 50% price pressure point. After not being able to break through this resistance level twice Cotton plummeted strongly to its current lower levels.
Chart 2 – Cotton July 2007 Double Bottom
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In Chart 3 below I have used the ABC Price Pressure Points tool to see how far the price of Cotton for July delivery has dropped from the December 2006 peak between the double bottoms to the second of the double bottoms in February 2006.
Taking this same price drop and projecting it down from the tops created at the 50% resistance level of the double bottom previously outlined in Chart 2 above, we find that the current price level may be finding further support as it has run down to the 100% price pressure point. This means that the current price drop from late March 2007 now equals the same price drop experienced from the December 2006 top to the February 2007 low.
Chart 3 – Cotton July 2007 Support
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What is also interesting to note is that the current support levels are around the 50 cent mark, with the close of the last two days on the above chart being 49.99 and 50.00 respectively. This 50 cent level can be viewed as a psychological support adding more support to the current price levels.
If a current low is definitely in place I would expect Cotton to find a base around these price levels and will be looking to the swing chart and waiting for a higher swing bottom as confirmation to enter this market to the long side.
Trade Smart
Mario La Marra
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