Cotton growers have found a new favorite drink over the last year: 10 parts gin and - nothing else. Yes, the vapors might blind you, but that would be a blessing as it means no more staring at price charts like the attached new-crop December 2012 weekly. The move the Dec has made since the first week of June 2011 has resulted in a 40% reduction price, from its weekly high of $1.0720 through this week's low of $0.6461. In the words of a certain ESPN sportscaster, "Ick and pooh!"
But things could be about to change. No, really, I'm not joking. Take a look at the chart again through your blood-red, bleary eyes and you might just see the beginning of a possible uptrend. No, I do not have a giant rabbit friend named Harvey. Why do you ask?
Anyway, as noted above, this week's action has seen the December contract post a new contract low of $0.6461. Since then it has rallied, with the body (range from open to last, blue box) engulfing the one established last week between $0.7050 and $0.6761. Classic candlestick analysis says that a bullish engulfing body at the bottom of a downtrend is a signal for a bullish reversal as market momentum has shifted. Those waiting for this pattern to be established need only watch Friday's close, needing a settlement above $0.7050. Thursday's close was $0.7228.
There are other signs that the market may be changing direction. Weekly stochastics (middle study) show the contract is close to establishing a bullish crossover in oversold territory. In other words, the faster moving blue line is moving above the slower moving red line below the oversold level of 20%. At the end of Thursday the blue line was calculated at 14.22% while the red line was at 13.57%. If this holds through Friday it will be the first bullish crossover by the December contract since late May 2010.
While these trend patterns reflect a possible change in opinion of the investment side of the contract, fundamentals still play an important role. Yes, I'm serious; you can quit laughing hysterically now. Moving on - the nearby new-crop December to March futures spread (bottom study) shows the carry held by the March has decreased this week to only 1.35 cents. A weakening carry is an indication of a less bearish commercial outlook, implying that upcoming June supply and demand report numbers could see slightly less cumbersome ending stocks and ending stocks to use calculations for the 2012-2013 marketing year. As a reminder, the initial look at new-crop fundamentals in May pegged US ending stocks at 4.9 million bales and ending stocks to use at a whopping 31.6%.
The initial upside target for Dec 2012 cotton is $0.7866, a price that marks the 33% retracement level of the previous downtrend. Given that the perception of supply and demand is still bearish, the best one might be able to hope for would be a 50% retracement back to $0.8590. Stretching the rally to the 67% retracement level of $0.9315 could be a challenge unless the Dec to March spread were to move to an inverse.
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Commodity trading is very complicated and the risk of loss is substantial. The author does not engage in any commodity trading activity for his own account or for others. The information provided is general, and is NOT a substitute for your own independent business judgment or the advice of a registered Commodity Trading Adviser.
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