The latest USDA report once again featured decreases to forecasts for 2015/16 world cotton production and consumption. California Cotton, while never king, has always been an important crop for the West; Californian produces by far the most Pima cotton (known for its extra-long premium fiber) in the U.S. Production, however, continues to decline, as farmers find it increasingly hard to support during the ongoing drought.
Investors, largely driven by emotions rather than discipline, tend to focus on volatility rather than the message of the market. This tendency prevents them from recognizing better opportunities in quieter markets.
Summary
The BEAR (Price) and BEARXO (Leverage) trends under Q3 distribution as the seasonal high approaches on the first week of March position Cotton as one of the better bear opportunities. Cotton displayed bearish setups of DI and CAP in July and December of 2015.
Price
Interactive Charts: BAL, BAL PF
A negative long-term trend oscillator (LTCO) defines a down impulse from 52.14 to 40.34 since the first week of June 2014 (chart 1). The bears control the trend until reversed by a bullish crossover. Compression (white circles) within the CEC cycle generally anticipates this change.
A close above 58.16 jumps the creek and transitions the trend from cause to mark up. A close below 23.75 breaks the ice and returns the trend to mark down.
Chart 1
Leverage
A positive long-term leverage oscillator (LTLO) defines a bearish crossover and bear phase since the fourth week of January (chart 2). The bear phase focuses the down impulse (see price).
A diffusion index (DI) of 6% defines Q3 distribution (chart 3). A capitulation index (CAP) of 40% supports this message (chart 4). DI and CAP's trends, broader flows of leverage and sentiment from extreme distribution (red dotted line) to accumulation and extreme complacency (red dotted line) to fear supporting the bears (green arrows), should not only continue to extreme concentrations but also restrain upside expectations until reversed (see price). A reversal to an up impulse under these trends, a sign of strength (SOS), would be bullish for Cotton longer-term.
Chart 2
Chart 3
Chart 4
Time/Cycle
The 5-year seasonal cycle defines strength until the first week of March 2016 (chart 5). This seasonal path of least resistance restrains downside expectations (see price).
Chart 5