Breakout or Breakdown?
Fundamentals
Cotton continues to move higher at breakneck speed, fueled by export demand. Last week's export sales numbers were six times what they would have needed to be in order to meet the USDA's estimated pace. Today's USDA report figures have to have a sharp upward revision to the exports figure. As of the last report, the agency pegged exports at 15.5 million bales, and the market is looking for an upward revision of between 16.5 and 17.5 million bales. With the US Dollar getting pummeled due to the out of control printing of money and tightness in overseas supplies, it is not difficult to see why the market can expect such a large month-over-month increase in the USDA's estimate. The agency can be conservative at times in its revisions, suggesting the revision could be closer to the 16.5 million bale figure. A number larger than 16.5 could result in further limit moves, whereas a smaller figure could trigger some profit-taking and possibly result in a much needed correction.
Trading Ideas
Markets that have made the extreme move that Cotton has present traders with a unique dilemma. On one hand, fundamentals only continue to strengthen, supporting the explosive move. On the other hand, some traders have to question whether the market has moved too sharply, too quickly and is actually outpacing fundamentals. Trying to pick a top in a market such as this is about as safe as sprinting across a busy highway. For this reason, some traders may wish to take a more cautious approach and trade an options strategy, regardless of their bias.
Technicals
The March Cotton chart is beginning to look parabolic. This type of situation oftentimes has one of two results: the market either corrects even more sharply than it rose or, if the gains are sustainable, an extended period of consolidation can arise. The problem is in the timing. A market can trade parabolic for an extended period of time and it can be difficult to tell, at least initially, whether a sharp down day is the beginning of a correction or consolidation pattern. Some traders may try to spot reversal patterns in the works, such as spinning tops, gravestone dojis or key reversals, and wait for confirmation before acting.
Rob Kurzatkowski, Senior Commodity Analyst
