Are Cotton Prices Finding a Bottom?

Commodities started off the year strong but as the crop reports started rolling in of the bumper crop that was expected for this year, prices began to fall a couple of months ago. We now have some futures markets sitting near multi-year lows, which means it might be time to start looking for interesting setups. With that, I think Cotton ($CT_F) prices may be ready to start putting in a bottom. 

In this piece for See It Market I go through the latest price action of the Cotton ETF ($BAL), the bullish setup in COT data, as well as seasonal patterns.

Keep Reading: Are Cotton Prices Finding a Bottom (See It Market)

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Weekly Technical Market Outlook 8/4/2014

We saw some selling last week with the S&P 500 ($SPX) off 2.7%, the Dow ($INDU) down 2.75% and now negative for the year, and Small Caps ($IWM) in the red by 2.57%. In last week’s Technical Market Outlook I showed a couple of charts that were showing a bias towards stocks heading lower, so I’m not overly surprised to see equities off a couple of percent. It was the worst week for stocks in two years, which I believe says more about the strength in stocks that’s taken place more so than the less than the recent 3% drop.

However, we did see some signs of capitulation on Thursday and Friday. Here are a few examples:
-The Volatility Index ($VIX), as measured by the ratio between $VIX and $VXV, entered backwardation.
-The Equity Put/Call Ratio hit its highest level in two years.
-The ratio between Declining Volume and Advancing Volume on the NYSE was over 9:1.
-The percentage of stocks over their respective 50-day Moving Average for the S&P 500, Dow, Nasdaq, and NYSE were near or under 30%.
-The -DI of the ADX indicator broke above 40, which has previously occurred at short-term lows in equities.

So have we seen an end to the selling? I don’t know (and neither does anyone else) but it does appear we may be short-term oversold and see a bounce. As we enter trading for August, which has historically not been a strong month for equities (we’ll get into that later) it’s possible we see bears continue to take things lower, especially if the geopolitical tensions in Ukraine/Russia heat up.

Trend

While we broke through the short-term trend line (not shown) the S&P 500 remains above its long-term trend line, and we have yet to see a break in the series of higher highs and higher lows. While we saw a bit of selling last week, the trend in the U.S. stock market is still positive.

Trend

Breadth

Like the break in the short-term trend line for price, we also saw a break in the short-term trend line for the Advance-Decline Line. While this breadth indicator created a small divergence with price going into last week’s sell-off, it now sits at support. Less than 60% of stocks on the NYSE are now above their respective 200-day Moving Averages with the up trend broken on the breadth indicator in the second panel of the chart below.

If selling continues this week then we’ll likely see an end to the up trend in the Advance-Decline Line as it follows price lower. How long this potential down trend lasts will be important in helping diagnosis the health of the stock market.

BreadthEquity Seasonality

As I mentioned earlier, August has not been kind to the S&P 500 ($SPY) during the current bull market. The below chart shows the percentage of each month that it’s closed higher since 2009. As you can see, August has been the weakest month, being positive just 33% of the time. Meanwhile, since 2010 the $VIX has seen August as it’s best month, having been up 75% of time. If we can get past August, the last four months of the year have all been north of 60% positive.

SPY seasonalityMomentum

After the negative divergence that helped send up a warning flag going into last week, we now have the Relative Strength Index (RSI) testing its bullish range support level. I’m watching to see if the RSI bounces here or if it’s able to get under 30 and become ‘oversold’. Bulls would prefer to see support held and the bullish channel maintained, but the bearish divergence of lower highs two weeks ago might have been some foreshadowing into a potential shift from a bullish range to a bearish range for momentum. We’ll see.

Momentum

Andrew’s Pitchfork

I tweeted out this chart on July 28th as possible resistance for the S&P but I wanted to show it here for those of you didn’t see the tweet. Below is a monthly chart of the S&P 500 going back to 2002. While I did not invent the Andrew’s Pitchfork (was developed by Alan Andrews I believe in the 1970′s) and name it after myself, this indicator helps show potential levels of support and resistance.

When using the price low in 2002, the high in 2007 and the follow low in 2009, the Pitchfork on the chart below is created. As you can see on the chart, in July we hit the upper trend line and have since bounced lower. This is the chart I’ll be watching if we do see price recovery and make a run at a new high. This resistance needs to be addressed if the bulls are to remain in control.

pitchforkHealth Care Sector

Based on the data collected by the Stock Trader’s Almanac, August starts a historically bullish period of time for the Health Care sector ($XLV), so I thought it would be nice to take a look at a chart of the Health Care Select Sector SPDR ETF ($XLV). Health Care has been one of the stronger sectors for 2014, after being a strong out-performer in 2013.

Most recently, like the S&P 500, a negative divergence in momentum developed as $XLV attempted to make a new high. The RSI indicator is now just above its support level which was created during previous declines in 2013 and 2014. Price is also above its potential support of the prior high in March and June as well as the 100-day Moving Average. With seasonality showing a bullish bias for health care and the current strong relative performance, it’s likely we see $XLV hold above support and continue its current up trend.

health care

Last Week’s Sector Performance

Health Care ($XLV) was the strongest sector last week, followed by Consumer Discretionary ($XLY) and Technology ($XLK). Energy ($XLE), Industrials ($XLI) and Consumer Staples ($XLP) were the weakest performing sectors for the week.

last week sectorYear-to-Date Sector Performance

Even though it was the worst performing sector last week, Energy is the best performing sector so far in 2014 followed by Utilities ($XLU) and Health Care.

YTD sector

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Financial Sector Continues to Weaken

For the bulk of 2014 the Financials Sector ($XLF) has been one of the worst performers. There have been some interesting developments on the chart for this sector, and that’s what I want to take a look at today.

First up is a chart of $XLF, its Volume Advance-Decline Line and the Percentage of Financial Stocks Above Their 50-Day Moving Average. These two breadth indicators can help us understand the ‘health’ of the financial sector by seeing how the underlying stocks of the sector are performing.

As we can see with the Volume Advance-Decline Line, while price has been going higher, this breadth indicator has been essentially flat as it hasn’t made a fresh high since March. As price keeps running into resistance at $23 the A-D line has begun to slightly weaken but has yet to make a lower low.

Meanwhile, the number of Financial Sector stocks that are above their respective 50-EMA has been dropping over the last couple of weeks, creating a negative divergence with price. This is a sign that each time $XLF has hit $23, fewer stocks in this sector have been able to stay above their intermediate-term Moving Average.

Based on these two breadth indicators, it does not appear things look overly bullish based on the internals of the Financial Sector.

XLF

Next lets take a look at momentum and the relative performance of $XLF vs. the S&P 500 ($SPY). On the top panel of the chart below we have the Relative Strength Index (RSI). Since June the RSI indicator has been making a series of lower highs as it creates a negative divergence. Even though price has been rising/consolidating, momentum has been weakening. Currently RSI is at the 50 level which has acted as support during previous declines. If momentum weakens and creates another lower low then we may begin seeing $XLF decline as well.

Looking at the ratio between $XLF and $SPY in the bottom panel of the chart we can see the strong under-performance out of the financial sector so far this year. However, things have begun to flatten as the sector starts to perform more in-line with the overall equity market. I’ll be watching to see if the ratio between these two can hold above support or if Financials continue to decline relative to the S&P.

XLF 2

Looking at the latest Relative Rotation Graph (shown below) we can see that $XLF has been attempting to strengthen as it moves from “Lagging” to “Improving”. The RRG acts as another way to look at sectors, assets, etc. in their relative performance with an Index.

XLF RRG

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.