This article is originally referred from IFC Markets Technical Analysis
Rainy weather in West Africa can contribute to the increase of cotton crop in Mali to 650 thousand tons in 2015/16 agricultural season from 513,5 thousand tons a season earlier. This was reported by the Malian Company for Textile Development. Will the cotton price fall?
Note that in 5 months its price rose by almost 35% and renewed a 2-year high. In this regard, the volume of long cotton futures contracts on the ICE Futures exchange reached 8-and-a-half-year high.
The main reason for the growth of quotations was the drought in India and Brazil. Note that China reduced the imports of cotton to 72,75 thousand tons in June, 2016. This is much worse than the preliminary forecasts of 80-85 million tons and 55% less compared to the same period of last year.
This trend has been observed since the beginning of the year. In the first half of 2016, the Chinese imports of cotton were 431, 25 thousand tons, which is approximately half less than the last year’s level. The USDA forecasts that according to the results of most of this year, Chine will buy 980 thousand tons of cotton on the world market.
In 2015, it purchased 1,8 million tons. Such a reduction may contribute to the decrease of prices. It is connected with the program realization of Chinese state cotton reserves in the domestic market. Last week, 28,8 thousand tons were sold from the reserves.
On the daily chart Cotton: D1 has not been able to overcome the 2-year high set in the middle of July of this year and is moving sideways. The MACD and Parabolic indicators have formed the signals to sell. The Bollinger bands have widen significantly which means high volatility.
The RSI indicator has left the overbought zone and has formed a negative divergence. The bearish momentum may develop in case cotton falls below the last 2 fractal lows at 71,5, which are simultaneously the lower boundary of the neutral range. This level may serve as a point of entry.
The initial stop-loss may be placed above the last fractal high and 2-year maximum at 74, 8. After opening the pending order we shall move the stop to the next fractal high following the Bollinger and Parabolic 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 74,8 without reaching the order at 71,5, we recommend cancelling the position: the market sustains internal changes which were not taken into account.
|Sell stop||below 71,5|
|Stop loss||above 74,8|
Original Source: IFC Markets Technical Analysis