Futures Market Analysis

Have you seen this latest article at CNBC about Cotton prices? It’s an interesting read. Now that we know some of the fundamental concerns, let us look at the charts. Usually, price action likes to stick relatively close to its 34 EMA. Until it runs too far away from it and goes parabolic. That’s what happened in late 2010 into early 2011. Also notice how violent prices fell back down once the run-up ran its course. Lesson: be careful chasing these types of moves.

Now that we have reviewed previous history, let’s move on to the now. The weekly chart shows an ABCD pattern with shallow retracement, which signals a strong trend. However, the left-handed skewing (4 weeks to 27 weeks) that triggered it showed a lack of upside momentum. But that all changed in late September with this recent surge higher. The two big questions now become: how high can prices go? and is it too late to be a buyer? Let’s tackle the first question. The weekly ABCD pattern suggests a minimum upside target of 124.37 to 125.50, which is its 100% projection and 261% extension. Above that is a weekly consolidation zone between 142.29 and 168.49 that occurred on the run down from its 2011 peak. This zone also contains the weekly ABCD’s 361% and 461% extensions.

Now that we have some upside targets available let us move on to the second question. Are we too late to enter? My favorite tools to use for pullback entries are volume profile clusters, the 34 EMA wave, Fib symmetry retracements, and change of polarity areas (old resistance becomes new support). The volume profile clusters show zones around 105.90 to 103.30, and 99.90 to 97.40. The 34 EMA wave currently sits around 100.06 to 97.16, but will change as price action moves. Fib symmetry retracements occur at 108.72, 106.59, and 98.00. Finally, change of polarity comes in from 96.71 to 95.60. Putting all of these areas together, I like the 100.06 to 95.60 zone for a potential buy. However, it’s likely that with a sudden upwards burst like we’ve seen that we won’t get a pullback of this nature. Therefore, the other zone to watch closely will be between 106.59 and 103.33.

Two last things worth mentioning are COT positions and seasonality. First, large traders are currently long at 192 week extremes and commercials are currently short at 238 week extremes. Be mindful as this can become an overcrowded trade quickly. Second, Cotton tends to see late October into late November weakness (possibly giving us our buy entry) before a surge higher that can last into late January to mid March.

Just remember, trading moves like this isn’t for the feint of heart. This market’s ATR has doubled over the past couple weeks. Be prepared for continued volatility ahead.

Last week I wrote an article for Barchart.com about a possible short-term support zone.  However, now there is another interesting trade set-up developing.  There is a heavy resistance zone between 161’14 and 163’02.  I will be looking to short inside this zone with the potential downside targets being the recent low at 158’22 and the top of my potential support zone at 157’08.  This resistance zone has a good amount of supporting factors, which are:

1. Change of polarity (old support becomes new resistance)
2. 200 DMA
3. Monthly R1 pivot point
4. 34 EMA wave
5. 100 DMA
6. 6 Fib symmetrical retracements
7. Resistance cluster of Fib extensions (60m)

This entire zone is potential resistance, but I will be focusing closely on the 161’20-162’17 zone.  This area has the greatest concentration of supporting factors.  The pattern fails above 164’10.  You could look to short the 30-year bond futures (ZB) or make some bearish option plays in TLT for a more cost-effective trade.  Either way, make sure you limit your risk and look to scale out at the downside targets I mentioned.

The Nasdaq (NQ) futures contract is currently range bound between 15699.00 and 15517.75 as shown on the 120M continuation chart. If prices can fall below this range BEFORE heading above it, then there’s a potential volume profile support cluster between 15384.00 and 15263.75. This zone shows the heaviest volume traded between the low on 8/19 until now. Further supporting this zone is the monthly pivot @ 15323.42, the potential double top target ~ 15346.75 (also the point of control), and the potential change of polarity (old resistance becomes new support). I would look to be a buyer in this volume profile zone. Aggressive entries would be the top of the range (15384.00), moderate entries would be at the POC ~ 15346.75, and conservative entries would be at the middle of the zone ~ 15323.75. This pattern fails below 15235.00. Upside targets would be to scale out in the middle of the current range bound zone ~ 15608.50, the recent high @ 15699.00, and any remaining contracts to let ride with trailing stops. There are a few different products to make this trade. You could use Nasdaq e-mini futures, Nasdaq micro futures, or QQQ call options. Just make sure to use the Nasdaq futures chart for your trigger if you buy QQQ options. The pattern fails below 15235.00, so place any stops below that level.

Example trades:

Long NQ @ 15384, stop @ 15234.75, target 1 @ 15608.50, target 2 @ 15699.00

Risk = -2985.00, target 1 = +4490.00, target 2 @ +6300.00

Long MNQ @ 15384, stop @ 15234.75, target 1 @ 15608.50, target 2 @ 15699.00

Risk = -298.50, target 1 = +449.00, target 2 @ +630.00

There is a potential bullish ABCD pattern, which closely resembles a flag pattern, developing in the Mexican Peso. This pattern is bullish because of the retracement, which is less than 50%. Anything less than 50% is bullish.  The trigger to this pattern is a break above .05025 before going below .04901. If prices can trigger this pattern by August 2nd, then we would have right-handed skewing as well. The skewing shows the momentum, which in this case would be strong. Weak momentum would be skewed to the left (i.e., less bars down to the swing low, and more bars to the breakout high).  The next step is to watch how price moves towards and above the breakout level on a smaller time frame (i.e. 240 min).  So far there are 2 ABCD patterns on this time frame.  Both have deeper than 50% retracements, which signals a weak up trend.  So we have some conflicting signals between the daily and intraday time frames.  These breakout patterns work best when both time frames are in sync.  However, the daily time frame does carry more weight.  Therefore, I anticipate a breakout on the daily time frame that could stall near recent highs (0.05074 to 0.05100).  Then I expect a pullback back to or slightly below the breakout area.  This could offer a nice entry because there is a volume at price cluster developing as price action has been in potential accumulation mode the past few weeks.

Set-up 1:

Buy the breakout at 0.05026, with stops at 0.04900 for a risk of 630.00/futures contract.  The target of this ABCD pattern would be 0.05156 for a reward of 650.00/futures contract.

Set-up 2:

Don’t buy the breakout.  Instead, wait for a potential pullback into the volume at price cluster.  This will lower your risk and increase your reward to risk ratio.  I will give more details on this trade in a follow-up post.  The stop and target would still be the same.

Lastly, we do have some possible upside obstacles that could serve as potential scale out levels before reaching the target zone. The first is between 0.05074 and 0.05100. This zone contains the swing highs from 12-9-20, 1-21-21, and 6-9-21. The next possible scale out would be 0.05123, which is July’s monthly R1 pivot.

Stay tuned for more analysis on this potential breakout.