July cotton has sold off over the last month along with the rest of this year’s crop markets. The drop in the cotton market however is being bought with considerable interest by the cotton market’s end user commercial traders. Commercial traders have been net buyers in each of the last four weeks adding more than 22,000 contracts. Furthermore, while the commercial traders have been adding to their long position, overall open interest has been declining. This places a larger concentration of positions in the hands of the commercial traders as the market’s other players are getting washed out on this downdraft.
Technically, the short-term moves in the cotton futures market appear to be setting up a textbook bullish divergence bottom which you can see on this chart. The first low was made on May 28 at 83.86. This was low enough to trigger the first buy signal which we sent out the following day. Three sessions later, the market traded up to 88.60. Yesterday’s low of 84.07 came very near our previous protective stop price but more importantly, it registered a much higher reading on our short-term momentum indicator. The large difference in this indicator reading versus market lows only .21 points apart is the key visual signal in this bullish divergence pattern.
There is a golden setup here to re-purchase the cotton futures market, buying the decline along with the commercial traders. Most importantly, the risk on the trade is only to yesterday’s low of 84.07. Whether the trader chooses to buy in above today’s high on a stop, forcing the market to prove its conviction or, takes advantage of the minimal risk based on the market’s current price, this is a classic commodity trading pattern.
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