Cotton Trading Near Historic Support

There’s something interesting going on in the Cotton market right now. For the most part a lot of these soft commodities have been destroyed throughout the summer. After huge corrections like this I try to look for extremes in sentiment to see if a reversal is coming or if the free fall will continue. You see, crashes rarely come when everyone expects them to happen.
First, look at what price is doing. With this obviously being the most important thing, it’s a good place to start. We can see that there was major support just above 66 in both early 2012 and in the summer of 2012. We broke down below those levels before quickly reversing higher over the last couple of weeks. These potentially false breakdowns always catch my attention. This is how some of the most powerful squeezes are born:

Now from a sentiment perspective, a sell-off like what we’ve just seen often takes pessimism to extreme levels. Here is an index based on a combination of surveys, Consensus Inc, options and futures market and a number of other sources. Public opinion has now reached levels rarely seen in the past. This is historically not a level of sentiment where we want to be selling:

We take this bearish sentiment and prefer to generally take the other side of the pessimism. Now, we also like to see what the smart money is doing. Are the commercial hedgers hedging? Or are they bullish on the Cotton market? This chart tells us that the smart money isn’t hedging at all and expecting Cotton to go up in price:

This is how very powerful moves are born. When you have a combination of extreme bearish sentiment, the smart money isn’t hedging, and we have a potential failed breakdown? I can’t ignore that.
Now from a price perspective, the only thing that pays us, we don’t exactly have the cleanest trade. Do we own Cotton above the absolute lows from 2010 and 2012 as we can see in the first chart above? Do we own it above the weekly closing lows from that support?
This is actually a great example of the massive difference between being an analyst and actually putting money to work. The analysis here is simple: support is there and the sentiment is screaming at us. But as far as execution goes, this isn’t an easy one.
I’m going to be patient and let things set up in my favor. Right now it’s just not there. But I thought it would add some value to point out what’s currently happening in this market. It’s really interesting isn’t it?
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