Cotton dropped more than 11 percent in the last four days of trading, so there must be a trading opportunity in here somewhere - right? 

Cotton has been no stranger to wide price swings in the last year, but the money has been made betting on the downside.  The latest down move looks a bit extended and the market managed to bounce on Tuesday.  This could be a sign that selling is exhausted or the market could pause before it makes another run lower. 

The fundamentals for cotton are not appealing right now.  Demand is the big issue for cotton.  The European debt problems have traders worried about demand going forward and fears of it spreading to the U.S. So, there are issues facing future demand and now we have to look at China.

China is the largest user of cotton in the world and they can basically move the market.  They recently made some large purchases of cotton, but we still had a steep decline in cotton prices??? The reasoning behind the price decline is traders feel China was just rebuilding their supplies and now the buying might be done for a while.  Throw in a possible drop in demand from the European and U.S. debt woes and this explains why traders have been scrambling for the exits.

Now, we need to look for a trading opportunity.  You can see cotton broke support around 95 then it broke additional support around 91.25.  I wouldn't say that was a convincing break below 91.25, as the market is still holding in that area.  I wouldn't buy here or sell here.  Some shorts could be trapped here if the market starts to move up, considering they sold on the break of support at 91.25.  They would likely cover and it could lead to a rally up to 95.  That is where I would be interested in taking a short position. 

Some traders might look at the latest move as a bear trap if the market starts to move higher.  That could be the case, but I would feel more comfortable buying if the market can recapture the 95 level.  The market is still negative and rallies to resistance should be sold. 

Cotton is an economically sensitive commodity, so economic developments should be watched closely.  If the debt problems are swept under the rug again, the financial markets and commodities could rally.  Basically, you want to watch for the risk trade coming back on.  It is off right now.  As long as the mood remains bad, cotton should be under pressure. 

Chuck Kowalski
www.CommoditiesStreet.com