Cotton Is 'Overbought,' May Drop 11%, Steel Vine Says: Technical Analysis

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30 Sep 2010

Cotton futures may be headed to an 11 percent decline, ending a rally that sent prices to a 15-year high, according to a technical analysis by Spencer Patton, the chief investment officer at Steel Vine Investments LLC. The 14-day relative-strength index and stochastics are signaling that the price likely will drop to 96 cents a pound within a couple of days and then slip to 90 cents by the end of October, Patton said. Yesterday, cotton for December delivery plunged 4 cents, the maximum allowed, to close at $1.0124 a pound on ICE Futures U.S. in New York.
“Cotton is extremely overbought, according to the stochastics, but the indicator is just about to roll over, indicating a good time to sell,” Patton said yesterday in an interview from Chicago. “Also, the RSI has broken below 70, which is an indicator that the price is losing strength and is headed for a pullback.”
Cotton futures rose 65 percent in the past year, as of yesterday, touching a 15-year high of $1.064 on Sept. 28, on concern that supplies will lag behind demand. India, the second- biggest supplier, said on Sept. 28 it will delay overseas shipments by a month. China is the world’s largest grower and the U.S. is the biggest exporter.
“The fundamentals of cotton are bullish, but the move has probably been too much, too quickly,” Patton said. “Long-term support for cotton is at 80 cents, and it should certainly stay above that through year end.”
Patton, who founded Steel Vine last year and invests mostly in commodities and equities, correctly predicted in July that raw-sugar futures would rally to 19 cents a pound.
In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.

Source: Bloomberg