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Nov. 18, 2005
Buy Cotton
Random Observations
Futures trading oftentimes requires a lot of patience in that there are trades you can "see" are coming, but once you're on them, weeks and months can seem like forever, if, as in this case with cotton, it just keeps going nowhere. I looked back through my cotton histories and found a couple of fairly recent years (1994-1995) where cotton's action going into winter was virtually identical to what this year's contracts have been doing....moving sideways, then moving more sideways, in the process essentially becoming what I consider a "coiled spring". In these two previous cases, when they finally did start moving, the bull moves were more or less non-stop, moving up 25 cents in 1994 and 45 cents in 1995. This obviously does not mean the same sort of thing has to happen with the current cotton market but I do continue to look for, sooner rather than later, the beginning of a MAJOR bull move in this market and I do think the move could easily resemble what happened in 1994 and 1995....On the following four charts, compare for yourself those two July contracts with the current July 2006 contract....You should be able to easily note the very distinct similarities between them, right down to the month by month "wiggles" as they wore out the most patient of traders....
One basic "rule" in commodity trading is that large consolidations are usually followed by large directional moves. I believe cotton firmly fits into this category.
Cotton Prices ARE historically quite low
As I have pointed out in previous newsletters, during the past 30 years, Cotton prices have easily spent 90-95% of the time at prices above current levels. While this does not mean cotton has to go up, it certainly means the idea of a bull market is something traders should be prepared for.
During those same 30 years, July Cotton has been below 60 cents at this time of year on nine occasions. IN EVERY ONE OF THOSE YEARS, SOME SORT OF BULL MOVE TOOK PLACE BETWEEN NOW AND JULY'S EXPIRATION (table following).
When July Cotton was below 60 cents
on Nov. 18th during the last 30 years

Year & Close as of Nov. 18

  High Trade after Nov. 18

   Net Change

2005 43.55



2003 55.15



2002 38.07



2000 53.84



1993 58.20



1989 53.67



1987 48.60



1978 53.90



1976 57.05



   July 2006 Cotton closed at 54.63 today.
Cotton Does Move
During the past 30 years, July Cotton has has averaged roughly a 20 cent trading range between now and expiration. Given that cotton has basically been sideways for some 16 months, I believe the possibility of matching that average is extremely high during the next 8 months. Futures are inherently volatile and cotton is definitely not an exeption to this volatility....While cotton certainly could go down from here, with US exports running at a record pace and world consumption doing the same, my own opinion is it is just a matter of time (short) before this market fairly explodes on the upside....I may be dead wrong but I believe the recent "drift" lower should quickly, and sharply, end any day now.
The United States is the world's biggest cotton exporter. China is the world's largest cotton importer as well as the world's largest finished goods textile exporter....Even before the headlines of the last few years associating Chinese demand with bull markets in various commodities, I had seen them be a major force in driving individual commodity markets to record levels, one of those specifically being in 1995 when cotton traded up to $1.15 a pound....The "Chinese story" generally only appears in the headlines long after one of those Chinese influenced bull markets has been going for a long, long time....I can easily imagine that being the case next summer when cotton is far, far above today's incredibly undervalued levels.
One more time, here's the long term chart.....
More on Treasury Bonds and Gold early next week.
Thanks....Give me a call...
Bill Rhyne
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