Trying to Find a Bottom
Today's Idea
The supply and demand fundamentals for Cotton remain very strong. However, China's tightening may be the wild card, as the inability to get loans could undermine the supportive fundamentals. The chart is hinting that the market could see more downside on a strong close below 110.00. If the market is able to hold here, prices may stabilize or move higher. Some traders may wish to consider shorting the March futures contract on a close below 110.00, with a protective stop at 117.50 and a downside objective of 98.00. The trade risks roughly $3,750 for a potential profit of $6,000. This would be considered a relatively risky trade.
Fundamentals
Cotton futures have found stability in recent sessions, after lending in China has shown some resilience. Some traders may have overreacted and planned for the worst after China raised interest rates earlier this month. The government has not taken further action to stem inflation to this point. Many traders have become cautiously optimistic that the People's Bank of China may take a wait and see approach to inflation. The central bank has historically kept things close to the chest and not given a clear indication of what its future intentions are, which still leaves an air of uncertainty. Some traders may wish to keep a close watch on the broad commodity markets, as the PBC may take further steps to limit lending. Despite the bullish fundamentals, the risk of China cutting their consumption of US Cotton remains a risk for the market.
Technical Notes
Turning to the chart, we see trading in the March Cotton contract centering near the 50-day moving average. The chart also appears to be forming a flag. Given the down move preceding the flagging, the bias seems to be with the bear camp. Failure to hold the lower end of the range at 110.00 could result in a test of the 100.00 level. The RSI is drifting into oversold territory, which could explain the support the market has seen in recent sessions. Momentum is showing bullish divergence from the RSI, which could be a sign that the market may continue to find strength in the near-term.
Rob Kurzatkowski, Senior Commodity Analyst
