Related Topics
Commodities , Trading
     

Cotton Futures: From Multi-Year High -- TO -- Decade Low. It's Not About the Virus!

by Robert Folsom
Updated: May 29, 2020

I'm Nico Isaac and THIS is Chart of the Day

Cotton Futures: From Multi-Year High -- TO -- Decade Low. It's Not About the Virus!

Anyone who has traded commodities knows the danger of feeling too "safe" with the trend at hand. These markets are the reason antacids were invented. Conventional wisdom suggests that following news is a good approach for managing risk.

Take this chart of U.S. cotton futures, for instance. From June 2018 thru April 2020, cotton prices wilted 45% to the lowest level in a decade.

The news-moves-markets model determined that the cause of cotton's crash was a one-two punch of trade wars with China and the production-halting effect of the coronavirus.

But as you can see on the chart, the US-China trade war officially kicked off on July 6, 2018, when several failed "truces" led to the first round of US imposed, China specific tariffs. Fast forward to December 31, 2019, and the first publicly reported case of COVID-19 was confirmed in Wuhan, China.

BOTH events occurred AFTER cotton's downtrend was already in full effect, leaving traders on the wrong side of one of the market's biggest reversals.

As for being on the right side -- the June 2018 Monthly Commodity Junctures rose to the occasion. At the time, cotton prices had enjoyed a bullish comeback, orbiting four-year highs. The news-watching experts this time saw several positive factors supporting cotton's upside, including a drop in production, a US-China trade war "truce," and soaring demand.

June 10, 2018 Wall Street Journal reports that demand for cotton by China had reached record highs, with the country buying cotton futures contracts equivalent to 400 MILLION T-SHIRTS!

The news set traders up for continued gains. Our June 2018 Monthly Commodity Junctures, however, set the stage for significant declines. There, editor Jeffrey Kennedy showed a version of this chart and said:

"Moving forward over the next 12 to 18 months, the pressure is going to be to the downside as we see prices fall easily to below 50."

Over the next 18 months, cotton prices followed Jeffrey's forecast for a decline until hitting the lowest low in a decade, near 48 in early April 2020.

In the March 20, 2020 Daily Commodity Junctures, Jeffrey had opened the door for a bit more decline, then a near-term rebound in cotton's price.

And, that's exactly what happened.

Stay on the right side of the near-, and long-term trend changes in the world's leading commodity markets today with Jeffrey Kennedy's Commodity Junctures Service. See below for more.

Commodities can be volatile.

But "volatile" doesn't mean "unpredictable."

Commodities are not a typical market, in a sense that their price trends are governed both by market psychology and the supply and demand factors.

Commodities can also be extremely volatile. But when volatility hits and emotions fly high, Elliott wave patterns actually get clearer.

See for yourself how the waves can help you navigate these markets. Risk-free for 30 days, give our Commodity Junctures a try.

Then, decide.

A Look at the Perilous Psychology of Financial Bubbles

Investors justify financial bubbles all the way to the top. This perilous psychology led to massive losses after the market peaks of 2000 and 2007. Now, in 2020, the same warning is showing up in the financial news.

Off with His Head: Kingdoms Fall When Social Mood Shifts to Negative

Big negative social mood trends drive big market declines. These trends ALSO drive social conflict, even revolution. So in periods of big bear market declines, we see that monarchs also fall. Watch for yourself just how true this is.

2020: "May You Live in Interesting Times"

Lots has been said about how unprecedented 2020 has been. From the financial markets' perspective, the fast bear market in February-March -- followed by a fast recovery -- certainly fit the bill. Watch our Financial Forecast co-editor touch on a few more points.