Cotton is Weaving a Complicated Story

The commodity complex has moved lower since mid 2011 and there are many eyes on this space. Cotton ($BAL) is no exception. The chart below shows the rounded bottom and move higher accompanied by a break of the long downtrending resistance line. It is also moving higher over all of the tightly bunched Simple Moving Averages (SMA). All is well and time to jump on board for the next move higher right? Not quite so fast. There is one caution flag in this chart. The Relative Strength Index (RSI) has become technically overbought, over 70. You can see from the previous

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oversold signals (RSI under 30) that the stock can still continue in the current trend being overbought for a while, but it is hard to justify a new entry at this point. And this makes sense if you look close in on the last 6 months. The rising wedge off of the bottom will be interpreted by many as a potentially bearish sign. And it will take a break over the top to dissuade them. If this were to happen soon there is still that troublesome RSI to deal with. Ideally some consolidation at the top of

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the range to work off the RSI Overbought condition and then a break over 53 can be bought looking for a move to 58. Else-wise a pullback to the SMA looks like the best entry. Of course the market could just go higher and not give you either one of those. In that case, look somewhere else for a trade.

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Dragonfly Capital Views Performance Through January 2013 Expiry

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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