Non-Correlated Long Setups In Soybean Oil & Cotton

If you’re getting a bit frustrated with the whipsaw action in the US Averages, don’t sweat it, a lot of market participants are. Fortunately for us, there are a whole world of asset classes out there that don’t give a hoot what the S&P 500 or Dow Jones Industrial Average are doing.

Two of these assets I’m watching over the next few months are Soybean Oil and Cotton. Price action is improving in these markets on a structural and tactical basis, but the sentiment and seasonal backdrops I look for aren’t present just yet. Additionally, as we’ll see on the daily charts, it will take time for the declining / flat 200 day simple moving averages to start rising and provide a tailwind for prices.

Let’s take a look at Soybean Oil.

chart

On the weekly chart, we can see that prices held their multi-year support near 30 and are now breaking out of a bullish falling wedge pattern. Additionally, momentum positively diverged at recent lows and is making new highs with prices. With prices 36% below the 200 week simple moving average, there is certainly a lot of room for mean reversionon a structural basis.

chart 4

On the daily chart we can see that prices broke out above a multi-month downtrend line and are now basing above support near 32. As we saw on the weekly, momentum on the daily also diverged positively at recent lows and is making new highs with price. Although the 200 day is still sloping down, it’s beginning to flatten out and should start to rise if prices can consolidate in this $32-$34 range.

Moving onto Cotton.

chart 2

On the weekly chart we can see a nice rounding bottom has formed with overhead resistance near $68. Momentum also positively diverged at recent lows and is hitting new highs with price. If prices can flag below this resistance and break out, I think that’d be extremely bullish from a structural perspective.

chart 3

In terms of the daily chart, we can see that same rounding base and prices being rejected recently at that $68 level. Momentum is in a bullish range, but has been diverging negatively as prices make new highs. Additionally the flat 200 day remains a headwind for higher prices in the short term. Ultimately I’d like to see prices consolidate between $66-$68 to allow the 200 day to start rising and momentum to reset. 

The Bottom Line: I’m not ready to pull the trigger in these names just yet, but they are definitely on my watchlist for the next few weeks / months. A positive development for both of these commodities would be further consolidation on the daily charts to allow the 200 day simple moving averages to begin rising and provide a tailwind for prices. If prices start to rip from here, I probably won’t get involved because in my experience rallies are extremely hard to sustain within the context of a flat or declining 200 day moving average.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.

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