Cotton prices have continued to grind higher since the beginning of December as one can see by the chart below. In this time frame, prices of July futures have appreciated approximately 17%, lifting trade to their highest levels in 27 months—near 97 cents/lb. This likely has something to do with the most recent US cotton harvest being the smallest in 4 years. Add to that the fact that there appears to be an appetite for Ag commodities among speculators and funds alike.
In recent weeks cotton remains range-bound in a sideways market, consolidating just above 90 cents. A penetration of the up-sloping trend line identified by the white line would be a game changer in my eyes. We are seeing the roll from May futures to July keeping the market afloat, but as that slows and/or the trend turns I expect the depreciation to accelerate.
The fact that cotton prices are breaking down in the face of the recent dollar weakness is another feather in the bears' hats. There are a number of bearish fundamental factors to keep an eye on as I await a technical confirmation: Exchange certified deliverable stocks are increasing (near 266,000 bags); Acres will increase as higher pricing has enticed farmers to shift more acres towards cotton as the USDA reported; Further speculation that ending stocks could double in the coming season if Mother Nature cooperates.
Let's also throw into the mix a seasonal tendency. While past performance is NOT indicative of future results I try to recognize patterns. Selling July cotton futures on or about 4/7 and covering on or about 5/4 has been a profitable transaction 14 out of the last 15 years, to the tune of 4.7 cents. Translation in cotton: $500 x 4.7 = $2,350. Will we be celebrating on Cinco de Mayo that this transaction worked in 2014? Time will tell. As I said above, past performance is not indicative of futures results. However, I like the idea of bearish trade and will be using the Fibonacci levels to help navigate my client's exit.
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