The cotton price has experienced a shellacking over recent years so is there any relief in sight for cotton growers going forward? Let's find out taking a top down approach to the technicals beginning with the yearly chart.
Cotton Yearly Chart
The lower indicators, the Relative Strength Indicator (RSI) and Stochastic indicator both still appear to be trending down and in weak territory - nothing for the bulls to get excited about yet. The Stochastic indicator does appear to be starting to turn but there is still room in time and price for lower prices.
The Parabolic Stop and Reverse (PSAR) indicator now has a bearish bias after price busted the dots on the downside this year.
I have added Fibonacci retracement levels of the move up from 2001 low to 2011 top. Price has already taken out the 76.4% level and I suspect the final pullback low will be around the 88.6% level which stands at US$50.86.
I have drawn an uptrend line from the 2001 low and I favour price testing this trend line before any substantial move higher commences.
Cotton Monthly Chart
There appears to be a "three strikes and you're out" low formation in play which consists of three consecutive lower lows. The recent low was the second lower low and so after a rally now I expect price to come back down and make a third and likely final low.
The lower indicators, the RSI and Moving Average Convergence Divergence (MACD) indicator are both showing a bullish divergence on this recent low and I expect a triple bullish divergence to accompany the next low.
I have drawn a couple of downtrend lines and I expect price to be rejected at one of these upper trend lines. Then price should come back down and test the lower trend line. After the next low I expect an uptrend to commence.
I have added the Fibonacci retracement levels from the yearly chart just to show a different perspective.
Cotton Weekly Chart
The lower indicators, the RSI, Stochastic and MACD, are all showing multiple bullish divergences on the recent low. This has led to a significant rally. These indicators are starting to look a bit stretched so perhaps a short term pullback is nearly upon us.
This rally has already taken out in bullish style a downtrend line I have drawn. This development should mean this rally has a fair way to go yet.
But let's not get too carried away. There is still a major downtrend in force and that is evidenced by the moving averages I have added to the chart with time periods of 50 (blue), 100 (red) and 200 (black). They are ordered as they should be for a big downtrend with the 200ma above the 100ma which is in turn above the 50ma. This rally will likely terminate around one of these moving averages.
To determine potential rally ending levels, I have added Fibonacci retracement levels of the move down from March 2014 high to recent low. I favour the 76.4% level at US$87.84 to bring in the rally high. Let's see.
Let's wrap it up by looking in close with the daily chart.
Cotton Daily Chart
The recent low was the fourth consecutive low - four strikes! This was accompanied by quadruple bullish divergences in the RSI, MACD and Momentum indicators. A triple normally does the job while a quadruple just rams the point home. Not surprisingly, an impulsive move up has ensued.
The RSI is now in overbought territory while the Momentum indicator has just recently turned down indicating this move up is now losing its momentum. A pullback shortly looks on the cards.
Price has already taken out the December 2014 high denoted by the lower horizontal line while I favour price taking out the October 2014 higher before any pullback commences. This is denoted by the higher horizontal line and stands at US$66.05.
So we will have a higher high in place shortly and then a correction should take place that puts in a higher low. Then price can whoosh back up to new rally highs. That's how I see things developing anyway.
Summing up, the short to medium term looks promising for the bulls however this is set within the overall longer term downtrend.
