Technically Speaking

Along with wheat and gold, cotton is one of the longest traded commodities still in existence. Back in its prime, King Cotton ruled U.S. trade before corn was a gleam in anyone but the Native American's eyes. It's long history is what makes today's cotton market's second-class status that much more interesting.

Cotton's long-term monthly chart reflects the general disinterest that continues to plague the market. Notice that the nearby futures contract (top study) is having difficulty building bullish momentum despite the fact monthly stochastics saw a bullish crossover established back in August 2012. That month, the nearby cotton contract posted a low of 69.86 cents per pound, just off its previous low of 66.10. From there the market rallied to a high of 93.93 (March 2013), before spending much of this year rolling sideways.

That is until this month when the December contract moved to a low of 78.06, below the previous series of lows near 79.30. With monthly stochastics now bearish once again, indicated by the faster moving blue line moving back below the slower moving red line, the market seems in position to slowly drift back toward its previous low.

Where is the pressure coming from? Keep in mind that every market has two sides, commercial and noncommercial, and for the time being the commercial side continues to grow more bearish. Supply and demand is reflected in the trend of the futures spreads, with the nearby spread (third study) showing a carry of about 1.8 cents. This is a far cry from the bullish supply and demand situation that existed when the nearby spread posted a high monthly close of 36.1 cents back in June 2011. Until fundamentals see a bullish turn it will be difficult to convince noncommercial traders to pour money back into cotton, leaving the initial technical upside price target of 119.20 soon forgotten.

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