Technically Speaking

Those about my age know the difficulties of long-term memory. When it comes to this blog, I vaguely recalled writing a post regarding the long-term cotton chart, but couldn't put my finger on when it was. So, digging back through the Technically Speaking archives I found it was three months ago, March 2 to be exact.

As the title of that blog ("Cotton: Long-Term Bullish Signals") suggests, technical indicators were bullish heading into the spring quarter (March-April-May). The long-term price target was a possible test of 109.90. However, as I discussed near the end of the piece, cotton could struggle to build bullish momentum, similar to what was seen in 2012.

With spring now over and the summer quarter (June-July-August) now ahead, the cotton market finds itself with the same bullish long-term signals, but going nowhere. The last three months have seen the most active contract (based on open interest) post a narrow trading range between the March low of 59.83 and the May high of 68.13. Meanwhile, monthly stochastics (second study) remain below 20% indicating both the market is oversold and it has failed to generate much bullish momentum.

But that could change in June as the new-crop December contract takes the most-active baton from old-crop July. The December to March futures spread was priced at par (even) as May came to a close, hinting at a possible uptrend back into inverted territory. If so it would reflect an increasingly bullish commercial outlook, likely tied to spring weather problems in the U.S. Southern Plains growing area that erased potential planted acres.

The key will be how noncommercial traders react to potential summer headlines. CFTC Commitments of Traders reports over the spring showed noncommercial traders holding, but not adding to, a net-long futures position (third study, blue histogram). As discussed back in March, and talked about frequently in this blog and in my On the Market columns, noncommercial activity is key to establishing trend.

If the most active contract, likely the December due to increased commercial activity, can get through initial resistance at the May high it could spark a round noncommercial buying that would jump-start the major (long-term) uptrend. If so the next target isn't one I discussed in March, but likely to offer stiff resistance as seen looking back on the monthly chart.

The 94.50 level marks the 23.6% retracement lf the previous major downtrend from 215.75 (March 2011 high) through 57.05 (January 2015 low). Note how it has held a number of rallies dating back to 2012. However, if the market's forward curve (series of futures spreads) continues to grow more bullish, reflecting the commercial view of long-term supply and demand, it should give cotton enough fundamental strength to push through to at least the previously mentioned 33% retracement level of 109.90, if not the 50% retracement level of 136.40 (eventually).

For now the market just sits, rolling nowhere fast. But that is expected to change before the month of June comes to an end.

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