RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

Cotton futures have been trending higher since last March; however, concerning technical action on the cotton daily chart is certainly cause for concern as many participants are now contemplating whether cotton strength could be coming to an end.

The 4/7 low earlier this month marked a relatively lower swing on the daily chart, surpassing the previous swing low on Feb 17.  This highlights a near-term breach in positive structure and could be an early indication that the cotton rally may be approaching a climax.  Adding to this scenario is the noteworthy bearish divergence between price and RSI in the recent peak on March 6.  Prices mad a new high for the year while the RSI was unable to produce this strength with a simultaneous new peak.  Instead, the new high in price corresponded with a relatively lower peak in the RSI, which could be an early indication of underlying weakness to come.

The fundamental side of the equation seems to play nicely to this argument as US planted acreage is expected to increase at least 21% year over year.  While US planting, and likely production, are gearing up for an uptick, traders note a 12% decline in Chinese imports from February to March this year.  Increasing supply and notable decline in demand from some of the World’s largest consumers does not bode well for a bullish argument for prices.  That being said, cotton prices have remained strong despite “cracks” in the technical foundation of the chart and fundamental shifts that may indicate a higher supply of cotton on the months ahead.  Traders would be wise to monitor prices closely up around these levels as a confirmed close below the 4/7 low could confirm a near-term trend shift from positive to more of a neutral/negative tone.  

 

Jul ’17 Cotton Daily Chart 

Jul ’17 Cotton Daily Chart

 

Erik Tatje