Technically Speaking

A look at the weekly chart for the new-crop December 2013 cotton contract shows it has seen an impressive rally off its low of 70.70 posted the week of June 4, 2012. Since then the contract has steadily, for the most part, rallied to this week’s high of 84.75. Notice that this is a test of technical resistance at 84.70, a price that marks the 38.2% retracement level of the previous downtrend from 107.36 through last June’s low.

At the same time, weekly stochastics (middle study) have moved into an overbought situation above 80%. This week’s sell-off has weekly stochastics in position for a bearish crossover, meaning the faster moving blue line crossing below the slower moving red line. If this is the case on the close Friday it would signal the contract is set for a move to a downtrend. Initial support would be pegged between roughly 80.00 and 74.75, the 33% and 50% retracement levels of the recent uptrend.

Notice the solid uptrend in the December to March futures spread (bottom study, green line). The spread has moved into an inverted situation, indicating a more bullish long-term commercial outlook for new-crop cotton. Much of this is due to the expectations of another decrease in planted acres in 2013, further tightening the domestic supply and demand situation. Given this commercial outlook it would be unusual to see the market fall much below support at the aforementioned 33% and 50% retracement levels. On top of that, it also seems likely that the contract should extend its rally to the 50% to 67% retracement levels of the previous downtrend, putting a longer-term price target between 89.00 and 95.15.

Seasonally the December 2013 contract is closely following its five-year seasonal index (not shown). The index shows the market tends to post its initial low weekly close the first week of December before rallying 15% through weekly close the second week of April. The December 2013 contract closed at 77.61 the first week of December 2012, and using the index would imply a possible high weekly close in mid-April of 89.25. Notice the similarity between the seasonally projected target and the previously mentioned 50% retracement target price. Therefore, a reasonable target for the December contract this spring would be roughly 89.00.

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