Cotton: The Mighty Oct and the September high

Commentary

Standing tall with open interest all of 200 (that’s a flat 200, not 200k), Oct cotton is pulling the rest of the board up. This is really a twilight zone of the year, a time vacuum in which there is no old crop cotton still for sale, and new crop is in the beginning of the beginning to fill an empty pipeline.

Cotton is unlike grains, which can go almost straight from field to storage, as cotton has to get in line to be ginned, then classed. This natural process is the reason there have been so many rallies and tops in Sep, right before the brunt of harvest takes place.

One of our favorite memories was listening to the chatter in the 1973 bull market, when cotton was on a September run to 99c. That was an all-time futures high, and the highest level since the War Between the States. Our father claimed that on the peak of the day when futures made their high, Julian Hohenberg said “there isn’t a single bale of cotton for sale anywhere in the world.” And that remark put in the high.

Varner View

Sell the Sep high, if you can recognize it. We went through all years from 1992 forward, then threw in 1973 just because it was the standout year. In this 23-year study, we found 9 years which peaked on or right around FND. The earliest Sep high was 2004 on 9/01, and the latest was 2010 on 9/28. There were 4 years in which there was no recognizable high, those were 2002, 2003, 2008, and 2013. The average high date was 15/16 Sep. The observation is to therefore watch market action within a few days of the average high date, and also around FND.

With Oct open interest so low, one may conclude that this contract has become irrelevant, but there may be one or two merchants willing to play with the piddling open interest and cert stocks. Let history be a guide to get down some shorts this month.

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