Unless you have access to the futures market, there are some investments that are not really accessible to the retail investor. I consider cotton to be one in that category as the only tracking vehicle, BAL, trades on average less than 20k shares per day. I have talked ad nauseam on the perils of illiquidity so I will not go down that path again but remember if you want to sell an illiquid investment and the market is falling, good luck trying to find a buyer at your price … and possibly at any price. I bring this up because of the strength of its chart, I wanted so desperately to add it to client accounts but refused to violate my investment rules regarding illiquidity.  In spite of that it is still worth reviewing the chart as these setups, when available, provide both a high probability of successful pattern playout and big upside potential.

Cotton formed an interim top back in April of 2014 at just above $95. From that point a waterfall decline transpired as it lost almost 40% in the next 9+ months bottoming in Jan of 2015. Since then it has been consolidating and range-bound bouncing between $56-$68. This sideways action continued for 2 boring years (this is exactly why these setups work so well all the sellers have left and only the smart money is left … to buy). One of my mentors drilled into my head the old adage of “the bigger the base the higher in space” so it should be obvious why cotton had my interest.  I prefer to see a minimum of at least 6 months so the fact it was working on 2 years was just that much more interesting.

As you can see it finally broke out last week on incredible volume, a classic textbook dream setup for much higher prices. This week (so far) it appears as if price is consolidating and digesting its gains but setting up for its next leg higher.  The fact that both patterns that have formed (double divergent low bottom and bull flag) have similar targets, I expect a high probability the $83 range will be hit. Even though I was unable to capitalize for clients, once this cotton move has played itself out, I will circle back around with a follow-up post as successful pattern setups are a great learning tool and go a long way towards out-sized gains.