Since putting in a top on 8/16 just above 93 cents December cotton futures have fallen a dime and are currently challenging the support levels that held the first week of June. Will that same level prove to serve as support once again? Past performance is not indicative of future results. One of my best trades in recent months was the bearish trade we instituted in cotton on its highs a few weeks ago…if this bullish trade could be half as successful at that I would be extremely satisfied.
The reason for the remarkable price decrease in such a short time frame is the idea that China will be dumping some of its massive cotton reserves onto the market and it has sparked an aggressive long liquidation…perhaps too dramatic. Additional bearish factors are the recent strength in the US dollar, appreciating 2.4% in the last three weeks and continued ideas that weather domestically is favorable for the crop. However today the USDA reported that export sales for the week ending 8/28 were close to twice the amount from one year ago totaling 163,300 bales. Being the US is the world’s largest exporter the market pays very close attention to exports as an indicator of global demand. New demand from China is a real wildcard as it is not clear if they will source their cotton from the US, Australia or India. This will continue to be a tug of war with China in the driver’s seat…BEAR in mind that for every bale of cotton that China buys on the global market they will release three bales from their strategic reserves.
All things considered I am not calling for a resurgence of a bull market but rather a rebound from oversold levels. I am looking for a return to the 50% Fibonacci level in the coming weeks lifting December futures to 87/88 cents. Structuring the trade I’ve suggested back ratio spreads…selling (1) December 85 call and buying multiple (3) December 88 calls. See the options spread charted below.
The reason for the remarkable price decrease in such a short time frame is the idea that China will be dumping some of its massive cotton reserves onto the market and it has sparked an aggressive long liquidation…perhaps too dramatic. Additional bearish factors are the recent strength in the US dollar, appreciating 2.4% in the last three weeks and continued ideas that weather domestically is favorable for the crop. However today the USDA reported that export sales for the week ending 8/28 were close to twice the amount from one year ago totaling 163,300 bales. Being the US is the world’s largest exporter the market pays very close attention to exports as an indicator of global demand. New demand from China is a real wildcard as it is not clear if they will source their cotton from the US, Australia or India. This will continue to be a tug of war with China in the driver’s seat…BEAR in mind that for every bale of cotton that China buys on the global market they will release three bales from their strategic reserves.
All things considered I am not calling for a resurgence of a bull market but rather a rebound from oversold levels. I am looking for a return to the 50% Fibonacci level in the coming weeks lifting December futures to 87/88 cents. Structuring the trade I’ve suggested back ratio spreads…selling (1) December 85 call and buying multiple (3) December 88 calls. See the options spread charted below.