Nearly two months ago we spotted a bullish technical divergence along with increased commercial buying in the July cotton futures. We wrote about her at Equities.com in, “Buyers Taking Control of Cotton’s Decline.” Clearly, we were wrong as the market has declined another 20+%. Fortunately, risk is always the primary concern. Therefore, we were left with a small loss while waiting for another opportunity.
The two primary characteristics we look for in a trade are following the direction of the commercial traders and minimizing risk. Commercial traders have continued to buy the cotton market with great eagerness. Each time the market has fallen, and it has fallen consistently, we have seen the commercial end users lock in more and more future supply. This makes all the sense in the world considering that cotton prices are the lowest they’ve been since October of 2009. Expectedly, commercial traders have been net buyers for twelve straight weeks and have brought their position to its most bullish levels since November of 2012. We’ve plotted the effects of strong commercial buying on the cotton futures market on this commercial trader chart.
December cotton’s recent action is showing signs of a bottom. Friday’s swing low of 62.02 has brought short-term momentum indicators back from severely oversold levels. Yesterday’s rally was strong enough to trigger the buy signal we’ve been waiting for since getting stopped out of the market in June’s trade. While we make no predictions for the end of year crop size, it is clear that substantial bargain hunting is taking place among the end users of cotton as they try to lock in futures supplies at multi-year lows. We will again buy this market while risking to Friday’s low. Given the current imbalance among the trader positions, we feel the odds for a short covering rally are substantial.
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