February 7, 2005
What Cotton Can Do....
I have always been more concerned with how commodity markets move than why they move (this is not to say I ignore fundamentals)...If I am looking at a market, I want to be sure it has a legitimate possibility of making a sizeable move, which is why much of my research dwells on what markets have done in past years.....and, Cotton Moves.
What follows is a quick study of strictly bull moves in July Cotton going back to 1990. This is not to imply Cotton can only go up this year...In fact, in some of the years listed, there were both bearish and bullish moves....At any rate, I have noted on the charts how large the bull moves have been, how long they have taken to play out, and how much money those moves represented per futures contract.
I have only included the years where there was at least a 10 cent move.
I'd summarize what I see here as follows:
The Cotton contract is for 50,000 pounds of cotton.
As I have pointed out in previous newletters, during the past 30 years only 3 July Cotton contracts have expired below where July is trading today, and only slightly so (see chart below). Also during those same 30 years, Cotton has averaged about a 20 cent range between now and expiration....In other words, it does tend to go SOMEWHERE. While I may be wrong and see Cotton go even lower from here, considering all of the bull moves shown above, with prices at these very low levels, I am making the bet Cotton will move, and that the move will be dynamically on the upside....
Here is what July looks like this year.....
All things considered, I see Cotton at least in the 60's by expiration.
Give me a call if have the liquidity, are willing to take the risk, and think this makes any sense at all. Depending on your objectives, there are a number of ways to go about taking this position.