Cotton Stalls
Fundamentals
Cotton futures continue to trade sideways after making new contract highs last week. The market has been unable to maintain its upward momentum due to the lack of fresh market and economic news, yet has also averted a sharp sell-off on profit-taking. Traders are likely to take their cue from economic data released this week, as there has been no major shift in market fundamentals. The weather in the US growing region has been dry with sporadic rain, which can be seen as ideal. American consumers appear to be opening up their pocket books a bit more recently, which can be seen as supportive for prices. While data from the US has largely been uneventful, India's protectionist strategies could be creating a somewhat dicey situation for Cotton traders. By halting exports, the Indian government accomplished what it had set out to do -- cool domestic prices. However, these policies have made an already tight international market even tighter. Some traders may want to focus on how this will impact demand for Cotton fiber. Textile mills find themselves between a rock and a hard place. Not only is the price of Cotton increasing, but the rising cost of Crude Oil has made manufacturing synthetic fibers more expensive as well. The lack of a cheap substitute could continue to support Cotton prices.
Trading Ideas
The market forces seem to indicate a mildly bullish tone for the Cotton market. However, both the chart and fundamentals do leave the door open for a downside reversal. For this reason, some traders may wish to wait for the July Cotton contract to close above 85.00 before entering a futures contract. Some more conservative traders may wish to consider entering into a bull call spread by buying the July 86 call (CTN086C) and selling the July 88 call (CTN088C) for a debit of 0.60. The trade risks the initial investment of $300 for a potential profit of 1.40, or $700.
Technicals
Turning to the July Cotton chart, we see the market trading in a sideways consolidation pattern. Since the preceding move was higher, the consolidation may favor an upside breakout. Prices have found support at the 20 and 50-day moving averages, rebounding after flirting with the averages. For the market to regain its upward momentum, prices will likely have to close above the 85.00 level. For the market to signal a downside reversal, prices will likely have to break 76.00 on the downside.
Robert Kurzatkowski, Senior Commodity Analyst
