Shrinking old crop stocks and increasingly strong exports for US cotton led to what can only be described as a textbook blow-off top in the July Cotton chart. Starting May 11, the front-month contract skyrocketed over 10.00 before the fierce rally culminated on the 15. From here, it only took about five trading sessions for the market to retrace all of its prior gains and revert back to the intermediate term trend line originating from last March’s low.
The dust has now settled and it appears as though the recent blow-off top in cotton has the potential to mark the highs for the year. Market participants are now beginning to shift their focus to new crop. With planted acreage up more than 20% year-over-year, new crop stocks appear poised for a solid year and the fundamentals on cotton lean bearish. Weather thus far has been accommodating here in the US, and barring any major weather setbacks, domestic yields for upcoming new crop should be on par with the 5-year average.
Prices have pulled back sharply following the recent top and today’s action validated support from the previously mentioned trend line. This will serve as initial support for the July contact with additional structure seen from 74.80 – 75.35. If the market can produce a close below 74.80, the pattern of relatively higher highs and higher lows would then be violated, opening the door to further downside potential.
Jul ’17 Cotton Daily Chart