SpreadEdge Capital specializes in seasonal spread trading across a wide variety of commodity markets. A spread trade is the simultaneous purchase and sale of the same commodity with different delivery dates.  SpreadEdge publishes a weekly Newsletter that provides several seasonal spread trade opportunities every week.

Overview

On August 11, I published an article highlighting “several indicators that point to a bottom in Cotton prices.  These indicators include the current price action, hedge fund position estimates, % carry yield, and relative price and position.”  This week we saw a clear breakout through resistance which should indicate higher prices for Cotton.

Current Price Action

Cotton was in a steady decline since late February of this year.  From the high on 2/28/24 to the low on Thursday 8/8/24, Cotton declined over 35%.  On Friday, August 9th, Cotton peeked out of the declining wedge.  Here is the chart from the original article.

During the week of August 12-16, Cotton clearly broke through but retreated back to levels lower than the original breakout.  This past week, the bulls again took charge and catapulted Cotton to its highest level of the month.

Hedge Fund Position Estimates Overview

The Commitment of Traders (COT) report, issued by the Commodity Futures Trading Commission (CFTC), offers a weekly snapshot of the positions taken by different market participants in the U.S. futures markets. This information aids traders and analysts in comprehending market sentiment and developments.  Published every Friday at 3:30 PM Eastern Time, the COT report reflects positions held as of the previous Tuesday's closing business hours. 

Non-Commercial traders are again short Cotton in record numbers during last week's Tuesday - Tuesday COT report (reported on Friday).  Non-Commercial traders are now net short (59,217) contracts.  The last time these traders were this short was August of 2019 which sparked a rally of ~ 27% over the next 6 months.  Last week some of the shorts got squeezed which led to a 5.5% rally in Cotton.  I suspect that this rally is in the early stages given that hedge funds have no additional trading capital to add to existing shorts and will likely be forced to cover these shorts as Cotton continues higher.

To Trade Cotton

The SpreadEdge approach is to trade calendar spreads based off of historical seasonality.  Cotton has historically been a “sell” during this time of year, so I have not been recommending a long calendar spread in my client accounts or in the Newsletter. However, I have entered an outright “buy” in a personal account.  I used the December contract because the October contract has extremely low open interest.

More Information

The SpreadEdge Weekly Newsletter is published every weekend and provides a broad overview of the important seasonal, technical, and fundamental indicators within the Energy, Grains, Meats, Softs, Metals and Currency markets.  In addition, spread trade recommendations and follow-up on open trades is also provided.  For a free copy of the Weekly Newsletter, please send an email to info@SpreadEdgeCapital.com

Use coupon code “SpreadEdge” and get the Weekly Newsletter and Daily Alerts for $1 for the first month.

For a limited time, you can receive my Futures Training Videos for free with a 3-month, 6-month, or 12-month subscription.

For a FREE eBook about the SpreadEdge seasonal spread strategy.

Darren Carlat

SpreadEdge Capital, LLC

(214) 636-3133

Darren@SpreadEdgeCapital.com

www.SpreadEdgeCapital.com

Disclaimer

SpreadEdge Capital, LLC is registered as a Commodity Trading Advisor with the Commodity Futures Trading Commission and is an NFA member. Past performance is not indicative of future results. Futures trading is not suitable for all investors, The risk associated with futures trading is substantial. Only risk capital should be used for these investments because you can lose more than your original investment. This is not a solicitation.