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Cotton Futures - Watch for the Breakout

The July Cotton (CT) daily chart shows the price of cotton making progress to the upside since late January, reaching a high of 68.13 on May 1. Since then the price has been stepping toward support near 63 from prior pullbacks.

Starting from late March a complex head and shoulders has formed (two shoulders on both sides of the head), the breakout of which could signal the direction of the next trending wave.

Figure 1. July Cotton (CT) Daily Chart

Head and shoulders are often viewed as reversal patterns--in this case traders would be looking for a break below the "neckline" (the trendline which connects the lows in the pattern) near 63. Head and shoulders can also be a continuation pattern though, in which case a rally above the current descending trendline near 65.50 would signal a potential advance.

Arguments can made for both an upside or downside breakout. The price is quickly approaching the 63 level with the price of cotton off almost 2% on June 11. A longer-term downtrend may still be a factor as well--in May of 2014 this contract traded as high as 83.4.

More recently though the selling has really leveled since November, and the February rally created a new multi-month high, followed by a another high (68.13) in May. That indicates some bullish inclinations. A false breakout to the downside of this formation, or a break above 65.50, sets the bullish scenario. 

For a downside breakout the target is 59, with a more aggressive target at 58. If the price breaks higher, the target is 70 to 70.5

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