10-05-2018: December Cotton: Weather Cooperates and Exports Down, but Very Oversold

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calendar Spread

Level Table
Other Factors

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This is one of the rare instances in our study of commodities where the news, and leading technical indicators are bearish but our own technical factors are overwhelmingly bullish. This condition happens when a commodity is technically very oversold and reactive in nature. Cotton is both. We would not expect to see cotton prices go to the moon anyi time soon, but the immediate situation provides an opening for a rebound in cotton prices which based upon historical data looks very promising.

We are going against the grain of most major analysts here, and there is a heavy speculative long position in cotton futures which could turn into an avalance of sellers as speculators begin to liquidate long positions. One might reasonably ask why they are long in the first place, after so much negative news. Are they looking at the same technical factors we are?

Intermarket Analysis

We fed Kansas wheat, Chicago wheat, and soybeans into a neural network to get the following result:

Parabolic Chart

December Cotton:

Parabolic Chart

Nirvana Chart

December Cotton:

Initial Chart

News Analysis

The cotton market appears to be dominated by good crop reports and anticipated good supply coupled with reduced exports and a strengthening U.S. Dollar making competition harder. Despite recent hurricanes, weather seems to be cooperating overall to favor large crops.

Some recovery from downside break in cotton prices may result from ideas that the NAFTA trade deal will support better trade relations. Cotton futures are extremely oversold. The short-term weather outlook remains negative with mostlyi dry weather for Texas, the Delta, and the southeast U.S. over the coming week. Crop conditions improved recently as a result and could provide price pressure. Slow but steady long liquidation is a negative force. The International Cotton Advisory Comittee raised their estimate for world ending stocks from 16.91 million bales to 17.16 million last month, but this is still down from the 18.80 million bales seen during the 2017/18 season. The U.S.cotton harvest is 19% complete, up 3% for the week ending September 30th. This was up 2% versus last year and 5% versus the 5-year average. The top producing states were Texas (with 25% harvested already), Georgia, Oklahoma, Mississippi, and Alabama. Cotton crops rated gooid to excellent were up 3% at 42$ while poor/very poor was down 4% at 25%. The current good to excellent is down 15% versus last year and down 5% versus the 5-year average. The poor to very poor is up 9% versus last year and up 4% versus the 20-year average. Of the top 15 states, 6 reported better, 6 worse, and 3 unchanged. The crop conditions improved more than traders expected and this could be a negative force. There is still a hefty net long position in futures contracts. Export news is bearish.

Crops have dried out from recent rains and cotton harvests are underway in South Carolina. Incessant rains in Tennessee have nearly halted field work. Alabama has received some much needed rainfall. But daily rains are negatively affecting Louisiana crops. Cotton prices have been pretty volatile when news of the U.S.-Canada trade deal hit the wires. However, the euphoria quickly subsided to the reality of a huge unfolding 2018 harvest and no resolution to the U.S.-China trade war.

Public comments from the Federal Reserve pointed to a path toward higher interest rates, strengthening the Dollar. The USDA said the 2018 crop is improving in its weekly crop condition/progress report. Its numbers suggested there was less damage to the mid-Atlantic states from Hurricane Florence than at first thought. However, to the farms that were damaged, it was real and tradgic. The market typically bottoms during the harvest phase of a crop cycle such as now. Last year the 2017 low fell on October 20th. This year the U.S.-China situation puts a different krinkle on things, with each crop year having its own set of dynamics.

Both domestic and foreign merchants understand a big crop is forthcoming. There is little incentive for them to chase prices higher. The Labor Department's monthly jobs data report has proven to be a two-edged sword for cotton. A strong economy suggests strong domestic demand for cotton textiles. On the other hand, a strong economy suggests the need for the Federal Reserve to hike interest rates, strengthening the U.S. Dollar which is an impediment to exports.

In Virginia, sunny and hot conditions will provide very desirable outcomes for the agricultural landscape.

Cotton supply and foreign currency depreciation are two factors depressing cotton. Vietnam is now the largest consumer of U.S. cotton along with Cambodia, Thailand, and Indonesia. But currency issues have caused the loss of Turkey. Political tension has also frayed U.S. - Turkey trade.

Because of drought, some farmers in Texas are abandoning dry land cotton fields at an alarming rate. 75% of the cotton fields around Plainview, Texas and south of there are being abandoned.

A recent study by Cotton, Inc., fond that 7 in 10 consumers perfer their sheets and bedding to be cotton-rich, around 72% in each category. Two thirds indicated they are likely to purchase sheets and bedding made in the USA with U.S. cotton.

Australian scientists are working on a non-wrinkle strain of cotton. They are working on understanding what determines length, strength and thickness of cotton fibers in order to produce a type of cotton that stretches like a synthetic fiber and doesn't wrinkle. Plants with long, thin fibers have this quality. Washing synthetics produces microfibers that pull free and enter waterways. They are not degradable and can build up in the food chain. Cotton fibers also shed but break down naturally. Also they are from renewable sources unlike synthetics which are made with petrochemicals.

Point & Figure Chart

 97.0|                                                                  R 10/ 3
     | ICE - Dec-18 Cotton #2, 50000 lbs, c/lb.    Cm.=0.06  Lim.= 3.3
     |                             X X
     |                             XOXO
     |                             XOXO
     |                             XOXO
     |                             XO OX
     |                             X  OXO
     |                             X  OXO
     |                             X  OXO
     |                           X X  OXO
     |                         XOXOX    O
     |                     X   XOXOX    O
     |                     XO  XOXOX    O
     |                     XO  XOXOX    O
     |                     XO  XOX      O
     |                     XO  XO
     |                     XO  X
     |               X   X XO  X
     |               XO  XOXOX X
     |               XO  XO OXOX
     |               XO  X  OXOX
     |               XO  X  OXOX
     |               XOXOX  OXOX
     |               XOXOX  OXO
     |               XOXO   O
     |     X         XO
     | XOXOXOX     X X
     | XOXOXOXO    XOX
     |OX      O O OX
     |OX          OX
     |O           OX
     |            O
      1        111       1     1
Our computer tells us a non-conventional reactive approach works best for on p&f charts. Therefore the above chart is taken as giving a buy signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and a seasonal up period.

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "Pattern". It is giving a buy signal.

Internal Printout 1 Internal Printout 2

Results of "Pattern" for Cotton (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system has triggered a buy signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $500. Initial margin on a single contract is $2,915. Use of options is advised.

Historic Range

Scale traders are not a factor in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Commercials with the best track record are getting increasingly-long.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a change in major trend to up is imminent at a volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Cotton May 76 Put and Sell (1) Cotton May 79 Put @ 1.57 to the Sell Side or Greater.

o 1 o 2 o 5

Some brokers offer ICE quotes only with no options charts, others offer no quotes but still let you trade ICE options, and some refuse to deal with ICE exchange at all.
We are unable to pull up ICE Exchange option charts on some of their products including cotton because the greedy bastards running that exchange want too much money for data. Orders for trades can still be entered for ICE option products with most brokers, but with the disadvantage of flying somewhat blindly.

Calendar Spread

What the Dec. - Jul. calendar spread suggests to us is that buying the near contract and selling the far one is at most times profitable, which we think is a sign that these futures may go flat in the long run. The best time to enter or leave the above spread is when it is at +0.30 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -2.40 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be at the buy the near, sell the far point.

Level Table:

Level Table

The path of least resistance is up in the short run but down in the long run.
 98.0|                                                                  R 10/ 3
 ICE - Dec-18 Cotton #2, 50000 lbs, c/lb.    Cm.=0.06  Lim.= 3.3
     |FJJJJJKKZ[   <<<
 59.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO=-0.204
       1 1 1 1 1 1 1                                     1           1
       0 0 0 1 1 2 2 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0           0
       0 1 3 1 2 1 2 1 2 1 2 1 2 1 2 1 2 0 2 0 2 0 2 0 1 0           0
       4 7 1 4 9 3 8 2 9 2 8 4 8 2 6 0 4 8 2 9 3 6 0 4 8 2           3

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 10/2 ).

Intraday Chart

                 Risk Versus Opportunity Report

                   CTZ8    December Cotton

                      High Price:  81.86
                   Current Price:  76.46
                       Low Price:  73.81

                            Risk:  0.068
                     Opportunity:  0.139

                    (O/R) Ratio =  2.038

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis + 1
Parabolic Chart - 1
Nirvana Chart + 1
News - 1
Point & Figure + 1
Cyclicals + 1
Seasonals + 1
Internal System 1 + 1
Internal System 2 0
Third System + 1
Historic Range 0
Commitment of Traders + 1
Range/Volatility + 1
Level Table + 1
Other Factors - 1
Total + 7
Place 5 December Cotton on a Buy Watch with stoploss @ 2.57 below the get-in point when recent price is represented as "76.46".