Buying the Cotton Market’s Decline

We used a slightly longer chart this week, going back just over a year to highlight the sideways action that has been the dominant feature of the cotton futures market and also to demonstrate the effectiveness of the commercial traders’ actions within this set of circumstances.

The cotton market first fell to these levels last July. You can see the commercial trader sell signal at the beginning of the chart followed by an early buy signal and finally, late last July, the commercial traders picked the first of what have been many bottoms as the market has bounced back and forth between $.58 and $.68. Looking back to last July shows our commercial trader models kick out three buy signals and two sell signals. Each of these provided a solid trading opportunity which, brings us to the current situation.

Fundamentally, the cotton market has been oversupplied for the last few years. The USDA’s reports this month anticipate that the global market will finally be slipping into a deficit situation by the end of this year. This will help reduce the still substantial current inventories and bring this market back into balance for the foreseeable future. That being said, it brings us to this trading situation.

The knee-jerk sell off in the cotton market below its trend line should be seen as buying opportunity due to the building commercial trader position.
The knee-jerk sell off in the cotton market below its trend line should be seen as buying opportunity due to the building commercial trader position.

The cotton futures market’s decline over the last week has created two noteworthy situations. First of all, it creates a short-term oversold situation which readies our momentum trigger. Combining this with commercial trader buying in 16 out of the last 20 weeks creates a technically oversold situation in a fundamentally bullish big picture. Their net position is now at its highest level in 15 months. Clearly, they view $.65 cotton as a valuable asset. Secondly, Friday’s close dropped the market below the technical support and trend line that has been building since January. Based on our analysis, we see this as a knee jerk reaction and most likely a washout of the weak long positions.

A close back above the trend line will reverse our short-term momentum trigger to back above its current oversold level. This will create a COT Buy Signal. This move would also provide us with the low chart point at which we will place a protective sell stop.

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