The Commodity You Aren’t Trading, But Should Be

02/07/2011 1:24 pm EST


Corey Rosenbloom

Founder and President, Afraid to Trade

Did you know that cotton prices have more than doubled since the September period when the first rumors of a new round of quantitative easing (QE2) were released?

Cotton is a market most of us never chart, but it’s doing something interesting right now in terms of a three-push pattern and nice bearish engulfing candles.

Let’s take a look at the past few months in cotton, see it double in price, and take a look at the current and past bearish engulfing candle patterns, which are rare, but fun when they form.

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First of all, cotton shows us how a commodity can sometimes trend better than a stock in terms of its non-stop series of higher price highs and lows (the definition of a trend).

Beyond that, I wanted to do a fun update of cotton that shows a present and past bearish engulfing candle pattern. These are among my favorite candle patterns, particularly if they form at some resistance level or are accompanied with negative divergences.

They don’t always produce full reversals—no candle can do that—but they often foreshadow at least a short-term pullback or add confidence to a trading decision in terms of entry and tight stop-loss placement.

The first example was in November at the $150 round number level (after price virtually non-stop doubled from $70). Price pulled back to the $110 level before continuing its uptrend to the second peak at $160.

A little doji candle formed—no engulfing.

Finally, we move to new highs at $180 as another big bearish engulfing candle forms as some traders scamper for the exits or take profits at the recent highs.

Cotton has now formed a three-push price pattern, and the recent high was met with a tiny non-confirmation in the form of a negative momentum divergence, but not a significant (obvious) one.

Anyway, I just wanted to do a quick post about two recent bearish engulfing candles, and we’ll see if the current move continues just a bit lower in similar fashion to the prior November example.

By Corey Rosenbloom, trader and blogger,

Corey Rosenbloom will be speaking at the upcoming Traders Expo New York. Register free to attend his session now!

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