For the last 3 months the ceiling for the cotton market has been just above 54. Three prior attempts to push through that level failed and sellers obviously controlled above that level. However, the most recent pullback was much shorter and shallower than the previous moves, and it now appears that buyers may have the necessary strength to break the resistance. In fact we did manage to break out through that first line of resistance at 54 on Monday 12-11-06.
The potential energy within this market is clearly evident in the wedge formation on the weekly and monthly charts. We feel a push up through 54 could signal a return of the underlying bull trend, and we expect a quick push up towards resistance near 60.
click on the chart to enlarge
Buy one March 2007 Cotton 55 call and at the same time, sell one March 2007 Cotton 60 call for a combined cost and risk of 1 point ($500) or less to open a position.
Max profit, assuming a 1 point fill, is 4 points ($2000) and occurs with March 2007 Cotton trading at or above 60. Break even is 56 so each point that cotton rises above 56 is a profit of $500 until we reach 60.
Max risk, before commissions and fees, and assuming a 1 point fill, is $500. This occurs at expiration with March Cotton trading below 55.
Odom & Frey
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