Time to Short Cotton?

Includes: BALB, JJA
by: Brett Owens

This is turning into "Commodity Short Alert" day here at Contrary Investing! We just warned you about the ailments of copper, which looks like it may have eaten some bad chow mein for lunch.

Also "down" on this "up" day for the markets was cotton - which has been breaking down in a major way over the past several trading sessions.

Click to enlarge

Cotton Price Chart 2010

Cotton breaks down below key support levels. (Source: StockCharts.com)

Cotton has dipped below key support levels - and it could have a long way down - perhaps all the way down to its February lows.

With a heavy industrial demand component, cotton could get hit just as hard as the base metals if the global economic recovery comes unhinged. Remember cotton's relentless march towards zero during the last downturn?

When China and India were booming a few years back, cotton had FANTASTIC fundamentals. Demand was skyrocketing in developing nations while acreage was in decline, as cotton was being passed up for corn and soybeans, which were fetching higher relative prices at the time.

But I don't like the short term outlook for cotton. I've learned that when commodity prices break down like this, it's often best to cover your long positions - and maybe even go short. Remember, the trend is our friend - and the trend in cotton appears to be down.

Disclosure: No positions

Editor's note: U.S. stock market investors can use iPath Dow Jones-UBS Cotton Subindex Total Return ETN (BAL) to gain long/short exposure to the cotton market.