After Losing 2/3 of its Value, is There an Emerging Set-up in Cotton?

The chart below shows that the decline thus far off Cotton’s peak price in 2011 is among the worst for a former bubble.

At this juncture (~+80 weeks after peak prices) only Silver’s decline off its 1980 top was worse.

At the same time, in the chart package below, we look at the initial declines off peak prices in the Shanghai composite, Nasdaq, Gold and the Nikkei using Fib support levels and compare to Cotton’s decline from its recent highs in 2011.

Note that all the other bubbles experienced material six to 12 month rallies when they had retraced to the downside a full 75% of their respective parabolic bubble moves higher.

If rallies did not occur at 75% Fib support, they came when the asset had declined ~27% below this level.

After their respective lows, Shanghai rallied 105%; Nasdaq +95%; Gold +70%; Nikkei +50% – all very quickly.

At its recent low of 66, Cotton had not only tested its 75% retracement level, it had fallen ~20% below it.

If cotton does not bounce immediately, it could fall to ~60, which is 27% below its 75% Fib support of ~82-83.

Should this level come into play, we should anticipate a strong rebound in prices if history were to hold.

At this time, it is probably worth taking a small, exploratory bet in the soft commodity (either futures or BAL) with the game-plan of adding much larger at the 60 level, with a stop some % below this price on the full position.

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