For the last ten consecutive sessions cotton prices have been in the red, shedding 7% within that time frame. Futures are within spitting distance of posting fresh '13 lows, closing under 80 cents/lb the last two days. A 100% Fibonacci retracement puts futures in March near 75 cents though I believe the red horizontal line in the chart seen below will provide support (78-79 cents). In the month of October, cotton futures ended down better than 9% for this contract (March 14'). The December futures front month contract is off by a greater margin...11%.
What is perplexing is that exports of late have been impressive, totaling 612,300 bales over the last three weeks ending 10/24 or an average of better than 200,000 bales per week.
From a fundamental standpoint, the drag has been a very large crop from India and lack of imports from China. China is expected to import 11 million bales compared to 20 million and 24 million the previous two years.
To me, this is all factored into the market so a reversal from current trade is my stance on any positive demand news or negative supply news.
While past performance is never indicative of future results I prefer it when a seasonal tendency supports my technical or fundamentalist stance on a trade. It would appear that in years past, cotton has found support very soon, trending higher into the beginning of the following year. The fact that we are buying after a healthy correction and working into bullish trade when technicals are indicating an oversold market also has me thinking bullish trade merits your attention.
Trade ideas:
- Sell March 14' 75 cent puts. 99 days until expiration. You should collect $800-900 per. You are 4 cents out of the money and currently have a 30% delta. Writing options bears unlimited risk.
- Buy some sort of upside call ratio spread in March 1 4'. A 50% Fibonacci retracement even if we trade to as low as 75.50 cents would lift futures back above 82. Current trade is 79.20 cents. I think we could see 85 cents...a level we traded at just three weeks ago.
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