Cotton ” Technical and Fundamental Analysis”

 

 

Fundamental Analysis

WTO

 

The WTO wants the US to cut its Overall Trade Distorting Support (OTDS) by 70%. US would then be required to slash its cotton subsidies by 75% in the next two years. At present the us hands out subsidies of 3.8 billion dollars to roughly 25,000 cotton farmers.

If the us cuts OTDS, farmers in India and emerging markets would get a better price for their produce. Subsidies lead to overproduction in US. Taking away from export markets and businesses from millions of farmers.

Pakistan

2007 – 2008 production was 12.6 million bales. That is a 3 million bale short fall of their annual consumption of 15.5 million bales. In order for the textile industry to fill their short fall it will cost roughly Rs 50 billion yearly. In order to save the apparel industry the Pakistan Apparel Forum has urged Pakistan government to discontinue the export of cotton.

India

July revisions for the global 2008/09 crop included a significant 1 million bale reduction (from 26.5 million bales to 25.5 million bales) in the production estimate for India, bringing the forecast in line with 2007/08 levels. High grain prices, leading to a reduction in cotton acreage, and a light monsoon season contributed to the revision and suggest a leveling in Indian production after six years of dramatic increases (production in 2007/08 more than doubled the 10.6 million bales from 2002/03). Indian exports have increased to an even greater extent over the same period (from only 56,000 bales in 2002/03 to 7 million bales in 2007/08). The exceptionally rapid pace of Indian export trade relative to the domestic market lowered the national stocks to use ratio below 20% in 2007/08 – a year of record production. An effect of this drawdown in stocks has been a 45% increase in the price of cotton in India this year. The price increase has impacted Indian textile and yarn mills to the extent that they have been drawn to political action and their efforts to increase domestic supply have already led to the elimination of a 10% import levy and a 4% import tax as well as the removal of a governmental export support.

China

 

China, the clothing and textile powerhouse. The number one consumer and producer of cotton. Has a one million bale revision in this month’s report. Reduced the Chinese 2008/09 consumption forecast to 54 million bales. Even with this downward revision, Chinese consumption is still estimated to increase 1.5 million Chinese production of cotton is expected to decrease 0.3 million bales. 

 

 

US

 

Projected US 2008 – 2009 production is at 14 million bales. Decreased half a million bales. Domestic mill use was raised 100,000 bales to 4.4 million. Due to the weaker dollar and higher transportation costs. International Cotton Advisory Committee estimates prices in the US at 83 cents/pound compared to 59 cents two years ago. 

Hurricane Dolly may have wiped out an entire 90,000 bale crop in Texas. With good growing weather in the other regions could make up some of the Texas loss but still have a few months to harvest.Conclusion of fundamental market analysis

 

Even with a slowing economy might not be enough to keep the cotton prices down. With the increase in demand from China, lower precipitation in India, lower production in Pakistan, WTO trade talks and the assumption of a busy hurricane season . This would suggest bullish influence in upcoming cotton prices.Technical Analysis

December contract has held the major support at 7150. Cotton has also seen a drop in volume with an increase in open interest. RSI has just come off of the over sold area and working its way back up. Weekly chart stochastics are showing signs that a bottom may be in. The USD hitting major resistance and a small rebound in other grains could help in an upside move. Fundamentals could divorce cotton from any other commodities and have a bullish sentiment for months to come.

Trade Recommendation – Bull Call Spread

I would much rather buy the March cotton options than December considering the cotton harvest period running into late fall early winter. Buy the March 90 call and sell the March 100 call for 165 or $825.00. That is a 6 to 1 ratio with a total profit of $4175.00 if March options expires higher than 1000. You also have to deduct commissions and fees.

Exit strategy to the down side would be for the march contract to close below 7600 or a 35% decrease in spread value. To the upside would be for the March contract to reach the 9250 level or a 50% increase in value. If multiple positions are entered liquidate half at the 9250 level and let the rest run.

 

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Transworld Futures believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.Futures trading involves substantial risk of loss and may not be suitable for all investors.

Wheat ” Is Promising Harvest Enough For Middle East Drought”

Lets start on the fundamental side of things. Canada, US and Australia are key players in the price of wheat in the upcoming months.

Australia had the driest month of May on record. Also according to the Australian Bureau of Meteorology most of the country received below average or very much below average rainfall March 1 through May 31. Those are key months for Australia due to those are sowing months for wheat.

In the Eyre Peninsula, west of Adelaide the South Australian capital, some Farmers skipped winter wheat plantings due to the rising costs of seed, fertilizer, and weed killer. (approx. $60.00 / acre not including wages) Also on mere projection on rainfall or lack there of.

If all goes well, we could see next to normal wheat harvest at 23.7 million tons verses 13 million tons in 2007.

Drought in Iraq slashed domestic wheat crop, forcing Iraq to import more than the usual 3 million tons per year. Pakistan is also suffering from wheat and flour crisis. Pakistan is planning on importing 2.5 million tons of wheat this year. As it has failed to production targets.

Even with Canada’s wheat plantings up 8% to 16.4 million acres and the USDA estimate for 2008-2009 ending stocks at 487-537 million bushels. Will it be able to keep up with the drought in the Middle East. Australia’s rainfall maybe the key to wheat prices in the upcoming months.

Technically speaking we are looking at December 08 wheat futures at support at 800.0 – 820.0 for the past couple days. We may have a break through down to the 770.0 level. Anything below 750.0 would be the continuance of the bear market in wheat.

Ten day RSI is at 36.91 and stochastics are in the over sold area. Open interest has been staying around the 98,000 level since the last down trend with volume picking up. If we can get back up above the 200 day moving average we should see a test to the 1000.0.

Wheat, since 1969 has been up 33 out of the past 39 years. (past performance is not indicative of future results.)

Trade recommendation is to purchase a bull call spread. Buying the December 08 Wheat 900 Call and selling the December 08 Wheat 1000 Call at 18.4 or $925.00. Exit strategy if market goes against you would be to liquidate position if the underlying futures contract closes below 768.0 or if the spread losses 33% of its value. Exit strategy to the profit side would be to liquidate half of your positions at next level of resistance. Which is 940.0.

Second trade recommendation would be Buy December 08 Wheat futures contract at 820.0 or lower and purchase a 820 put option for 67 or $3,350.00 . The in the money put option is about half the margin required for the futures contract. Use same exit strategies.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Transworld Futures believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.Futures trading involves substantial risk of loss and may not be suitable for all investors.

To contact Jimmy Tintle email is jimmy@transworldfutures.com or reach him by phone at 1-877-843-4519. Transworld Futures offers a wide variety of trading tools, webinars, and simulated trading. We also various types of accounts from deep discount online trading to managed futures, and FOREX accounts.

Canadian Dollar “Loonie Looking For Breakout”

      The Canadian Dollar on a weekly chart has formed a nice symmetrical triangle, but who is going to win the fight? The fundamentals are going to be the determining factor. There are two ways you can look at the Canadian economy.

      For the bulls, international investors bought C$10.7 billion in securities. Is this a pre-warning to the bears that the Canadian economy is better than any other G8 countries. Canada’s inflation record this year is better than the other group of seven industrialized nations. Consumer Prices advanced 2.2% in May from a year earlier, compared with US at 4.2% and the UK at 3.3%.

     Economists are looking at peak inflation in the first quarter 2009 between Jan and March. At a rate of 4.3%. After March they looking for slow down to 2.9% going into the following quarter.

     Now for the bears, if reports come out worse than expected would be good to drive the Loonie down and also better than expected reports in the US and UK. A continued stalling in export and home sales will also drop the Canadian Dollar.

     Canada is the second biggest crude reserves behind Saudi Arabia, and is the second largest wheat exporter. If crude and wheat continue there downward move will drive exports down.

     For a trade recommendation I am looking at going for a reverse ratio spread. This spread is initiated by selling an at-the-money put and call, and purchasing two or more out of the money puts and calls. You would like two obtain a credit or at worse break-even on the debits vs. the credits. You do not want to hold the position any longer than 30-45 days left and you want at the least 3 months left at time of entering.

     Sell the December 9900 put for 222 or $2220.00 and buy two 9550 puts for 95 or $950.00/each. At the same time sell a 9950 call for 222 or $2220.00 and buy two 10300 calls for 99 or $990/each. The options have 137 days left. For money money management or exit strategies please contact me at jimmy@transworldfutures.com .

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Transworld Futures believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.Futures trading involves substantial risk of loss and may not be suitable for all investors.

To contact Jimmy Tintle email is jimmy@transworldfutures.com or reach him by phone at 1-877-843-4519. Transworld Futures offers a wide variety of trading tools, webinars, and simulated trading. We also various types of accounts from deep discount online trading to managed futures, and FOREX accounts.