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    Technical Analysis #C-COTTON : 2016-05-03

    China announces first cotton auction to sell national reserves

    Cotton is traded in a very narrow range for the third straight week. Like other agricultural futures, their prices depend on weather forecasts. The cotton prices rise in case of higher risks of drought. Nevertheless, there is a strong deterrent in the market: end of last year China announced its plans to release the state cotton reserves.

    In our opinion, cotton differs from other agricultural futures as it is not a foodstuff. As a rule, farmers and consumers are content with GM varieties with improved yields. This helps to increase faster the production volumes and may weigh on prices. This year China is planning to dispose of 2mln cotton from state reserves in period of May 3 – August 31, the National Development and Reform Commission reported. The daily sales will not exceed 30 thousand tonnes of cotton. The first auction is to take place early this Tuesday. Mid-April the Chinese officials postponed the start of sales which made the cotton prices soar. If an auction fails again, the situation is likely to repeat. Zhengzhou Commodity Exchange has already expanded the set limits of price deviation and the collateral for the instrument. The total China’s cotton reserves amount to 11mln tonnes. The global cotton crops are estimated at 21-27mln. tonnes. On May 10, 2016 the USDA is planning to release its monthly cotton market report which may influence the prices.



    On the daily chart Cotton: D1 is in mid-term uptrend above its 200-day moving average having formed the “flag” chart pattern near the upper boundary of the more long-term sideways trend. The MACD and Parabolic indicators give signals to sell. RSI is in the overbought zone, no divergence. The Bollinger bands have widened a lot which means higher volatility. The bearish momentum may develop in case the cotton falls below the support of the “flag” and the Parabolic signal at 62.7. This level may serve the point of entry. The initial risk-limit may be placed above the two last fractal highs, the year high and the Parabolic signal at 64.6. Having opened the pending order we shall move the stop to the next fractal high following the Parabolic and Bollinger signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. The most risk-averse traders may switch to the 4-hour chart after the trade and place there a stop-loss moving it in the direction of the trade. If the price meets the stop-loss level at 64.6 without reaching the order at 62.7, we recommend cancelling the position: the market sustains internal changes which were not taken into account.


    Position Sell
    Sell stop below 62.7
    Stop loss above 64.6

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