The Goldman Sachs commodity index continues to tease with a breakout above a 3 year triangle. This series of lower highs and higher lows has gone on since May 2010, and one could make a case that the upper line began at the top of the commodity cycle in July 2008. Chart below shows the index and how it is currently perched barely above the upper resistance line. Below the GS index is that of spot cotton, which has its own triangle, or declining wedge. The upper line began in Sep 2011 and the lower line began in Mar 2009. Cotton did what a lot of commodities do to confound traders, by first breaking out of the triangle to the upside 3 weeks ago, then crashing back down below. Thus all it did was run a horde of stops and get everyone long on what they assumed was a breakout that occurred at about the 8750 level.
Support for cotton does not surface until the lower wedge line just above 7500. While cotton tried and failed to break out of its 2 year triangle, the jury is still out whether or not the Goldman index can make a clean and decisive break.
We have no other ideas other than try to be patient and sell a rally. Our fear is that the market drifts lower and triggers more long liquidation by specs and funds. Cotton finds itself in somewhat the same boat as does soy, with a tight US balance sheet but a world supply that is anything but tight. US cotton prices will likely stay elevated above other A index growths for most of this fall, and perhaps into winter.
