I’ll be honest.  I’m not particularly looking for a whole lot this week in terms of great trade opportunities.  But, this one caught my eye.  There is an interesting opportunity brewing to get short cotton.  Without going into all the technical analysis on this…  I will present two charts: a) a forecast of cotton prices for the year built on a very basic quantitative model and b) the actual price for the year.

Here is the forecast:

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The forecast suggests we should be on the look out for:

  • a major top around January 24th
  • a major bottom around March 26th
  • a major top around  May 7th

The next chart is what actually happened this year:

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The actual chart shows:

  • a high the week of January 30th (in-line with forecast)
  • a low on week of March 13th (a week earlier than forecast)
  • a high on May 15th (a week later than forecast)

So, the forecast proofs relatively interesting.  The biggest discrepancy comes after the May 15th high.  The forecast indicates the market generally drifting lower.  Yet, prices have been generally drifting higher.  What gives?

First off, it’s just a forecast.  By no means is there any guarantee of accuracy.  But, if there is any faith in the model, what might explain the difference?  Said differently, why might the forecast be “broken”?

Possibly the US Dollar has something to do with it.  As the dollar falls, other assets priced in dollars are rising: equities, energies, metals, and commodities.  Cotton falls into the last category.  Let’s take a look at what was expected of the dollar this year and what actually happened.

The following chart is a simple forecast of the USD for 2009:

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Some highlights from the forecast include:

  • starts on an uptrend until a major top on February 23rd
  • a major high on March 23rd
  • a major low on July 25th
  • up from their… before rolling a bit later

The next chart is the actual performance of the US Dollar:

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The actual performance of the US Dollar shows:

  • an uptrend until week of January 23rd (about a month before the forecast)
  • a major top on week of March 6th (a couple weeks before the forecast)
  • a major bottom on June 6th (a bit more than a month prior to the forecast)
  • then the actual price just starts rolling over to new lows…

Perhaps this dollar sinking beyond expectation has something to do with why cotton has been pushed to higher forecasts and the forecast itself is broken?  It’s all conjecture.  But, with the dollar testing lows, and extremely oversold, it’s not a bad time to start thinking long dollar.  Albeit, it may be a bit early for such a trade.  Perhaps in November we will see more convincing follow through in the dollar.  Regardless, if the dollar will rise that will put downward pressure on cotton, which will only reinforce the short position.  Hence, some of my curiosity regarding a the value of a short position in the cotton market.

As always, there is no trading advice offered here.

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