Technically Speaking

Cotton: Long-term Bullish Signals

Source: DTN ProphetX

A close look at the monthly chart for cotton shows a number of important technical signals were established at the end of February, all of them bullish. First, the more active May contract moved to a new 4-month high of 66.24, falling just short of taking out the September 2014 high of 68.48. Second, the May was able to close near its monthly high at 64.93 on increased support from noncommercial traders (third study, blue histogram). This group moved from a net-short futures position of 15,572 at the end of January to a net-long futures position of 46,577 contracts to close out February. Commercial traders also provided support, with the carry in the nearby futures spread whittled from 0.66 to 0.20 over the course of the month (bottom study, green line). All of this helped to establish a bullish crossover by monthly stochastics (second study) below the oversold level of 20%, confirming the idea the major (long-term) trend has turned up.

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Taking all of this into account the cotton market, over time, should test initial resistance at the 109.90 level. This price marks the 33% retracement of the previous major downtrend from 215.75 (March 2011) through the 57.05 low (January 2015).

However, a look back to 2012 shows that we've seen this setup before. In July 2012 we saw a similar situation, except that noncommercial traders continued to hold a net-short futures position. While this group would go long, up to 78,793 contracts at the end of March 2013, the future market was not able to break through the 100.00 mark, posting a high of 93.93 in March 2013 and 97.35 in March 2014.

The key difference this time could be noncommercial interest. If this group continues to buy it could spark a stronger rally. Keep in mind though that the market's seasonal tendency is to post a high in late February/early March, opening the door for the market to give back some of last month's solid rally.

Still, if this were some anonymous market and I was looking at its monthly chart and structural makeup (long-term trend futures, spreads), the conclusion would be a potentially strong uptrend in the making. We'll see if cotton can live up to this potential.

To track my thoughts on the markets throughout the day, follow me on Twitter:www.twitter.com\Darin Newsom

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