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Cotton Near Two Year Low: Trading Opportunity

Cotton No. 2 is currently trading near a major double-bottom support level from April of 2012 at 66.79.

Similar to the drop recently seen, the April 2012 decline was also very sharp. It took time for the price to ultimately trend higher, but the 66.79 level wasn't revisited after that April...until now.

That level resulted in a major trend change and therefore, at this time, remains a significant support level.

Figure 1. Cotton No. 2 Futures (CT - December Contract)

This support level offers an interesting trading opportunity. If buying here a stop can be placed below the support level, near 65 or 66 for example. If that support level holds it leaves a lot of upside room for the price to run--a target near 75 isn't unreasonable. If the cycle repeats, there is potential for a larger longer-term rally come early 2015.

The argument against is that this trade attempts to "Catch a falling knife." Yet there is evidence to suggest strong support in the area; if support doesn't hold, risk is defined. If it does hold the reward to risk ratio is favorable.

Another approach is to wait and see if the level breaks or holds. Either the downtrend continues--in which case wait for a pullback before looking to participate on the downside--or an uptrend develops. In the latter case, wait for the pop higher and a pullback that stays above support before going long.

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