King Cotton & Commodity Imbalances

08/20/2019 9:32 am EST

Focus: COMMODITIES

Andy Waldock

Founder, Commodity & Derivative Advisors

COT analysis on Commodity Markets are presenting many opportunities, but Cotton offers the only trade signal this week, reports Andy Waldock.

Many of the imbalances within the commodity markets continue to grow. However, we must wait for the setups to trigger before entering a position. Patience is the key. So, with one new trade this week, we’ll provide the back-stories in the other markets to get you ready for the opportunities ahead.

Softs

Cotton: This is our only trade for the week. Commercial traders set a record net long position while defending the December contract’s low at 57.26. The weekly signal piggyback’s our daily email’s buy signal issued on Aug. 9. This is a classic bullish reversal (see COT TABLE below).

cot table

Orange Juice: Sticking with the softs, the commercial traders in the orange juice market are very near their net long record position. Historically, when the commercial position is net long 6k+ contracts, the market has rallied substantially. This was responsible for the brief pop in March, ahead of trade war saber-rattling. The last two examples were June of 2017 and March of 2015. Resistance at 105 currently binds the November contract, which is supported by commercial buying at last week’s low of 98.45. This market’s decline should now be viewed as a buying opportunity.

Treasuries: The commercial traders continue to buy the long end of the yield curve while selling the shorter term. Commercial traders sold more than 35k five-year Treasury notes while buying more than 10k 10-year Treasury notes and 5k 30-year Treasury bonds. This is yield curve flattening driven by an expected decline in long-term interest rates and is bearish for the economy. Though the entire fixed income futures complex is overbought.

Grains

Corn: The corn futures market has reverted to its spring pricing. We alerted our readers to short corn while it was trading near $4.50, following it up with a $4ish target for our short position. We were flat heading into last week’s reports and remain so. However, the corn market’s defense of the May low at $3.63 for the December contract may still be an excellent place to buy back short hedges or, establish new long positions looking for a bounce through month end. I will not remain long the market by month’s end as the primary seasonal harvest sell-off sets in, quickly.

Soybean Oil: The soybean oil market internals went crazy last week, even as volatility remained calm. The net positions of the commercial and speculative traders swung by more than 50k contracts. Unless I missed a data point, this is the most significant single week swing I can find. Both the commercial and speculative positions were positioned neutrally heading into last week. This gyration suggests that the market’s players have vastly different ideas about last week’s report. Our guess is to side with the commercial traders and look for a brief washout of the weaker speculators. Tabb this market.

Stock Indexes

Commercial traders were net buyers in the S&P 500, Nasdaq 100 and Dow Jones futures. These three markets have all tested and been supported by their 90-week moving averages. Perhaps, their view is that falling rates will continue to support the stock market…until it doesn’t. The Russell 2000 is the only index in which the commercial traders were net sellers, and it has been below its long-term average since the first week of August.

Here is what Andy had to say about seasonality and the COT Report at the recent TradersEXPO New York.
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