Weekly Analysis: Cotton

2021-08-05T16:00:53-05:00August 5th, 2021|Softs|

Market Type: 9 (Most Bullish)

  • Trends
    • Secondary (intermediate-term): Up (Contra-seasonal)
      • Dec cotton posted a new contract high of 91.00 the week of July 26 before closing 0.27 lower for the week
        • This raises the question of a possible bearish spike reversal, though I’m looking for confirmation the uptrend has come to an end with a new 4-week low.
        • The contract has posted a high of 90.90 this week
      • Noncommercial traders continued to add to their net-long futures position
        • Another 8,544 contracts for the week ending Tuesday, July 27
          • Long futures increased by 8,736 contracts
          • Short futures increased by 192 contracts
  • Fundamentals
    • Bullish
      • Dec21-March22 futures spread closed at 0.29 Thursday
        • This spread looks to be in position to extend its secondary downtrend though (see attached weekly close-only chart)
      • Dec21-to-July22 forward curve closed at an inverse of 2.07
        • Indicating the long-term supply and demand outlook remains bullish
  • Seasonality
    • Bearish
      • Dec Cotton 10-year index tends to top first weekly close of April
        • Drops 12% through the third week of November
      • Dec21 is sitting at a potential new high weekly close with Thursday’s price of 90.68
  • Price Distribution
    • Dec21 closed last Thursday at 90.68
      • Putting it in the upper 11% based on weekly closes back through the 2011 contract
  • Implied Volatility
    • Moderate-to-High
      • Dec Cotton ~ 26%
      • High volatility tends to reflect increased noncommercial activity
      • High volatility genially means option premiums are overvalued
  • Theoretical Positions
    • Producers
      • 2021-2022
        • It’s possible 25% of expected production was priced near 84.33 the week of March 1, 2021, following the previous week’s bearish key reversal.
        • Another 25% of expected production might have been priced near the weekly close of 89.66 (week of July 19), based on a bearish spike reversal
          • If not, up to 50% of expected production could be waiting to be sold on a stop below the previous 4-week low of 86.35
            • More aggressive marketers could push this to 75% with that same stop price.
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