ICE Contract Cotton No.2 Review // End of the Bearish Trend?

What is ICE Cotton Contract?

The ICE (Intercontinental Exchange) cotton market plays a crucial role in the global cotton trade. The ICE Cotton No. 2 futures contract refers to an agreement to purchase and deliver a specified quantity and quality of cotton at a predetermined future date. Each contract represents 50,000 pounds (approximately 22,680 kilograms) of cotton, with prices quoted in U.S. cents per pound.

How are ICE Contracts Used in Cotton Trade?

ICE contracts are utilized by cotton buyers and sellers to finalize transactions, often resulting in physical delivery of the commodity. Farmers, traders, and textile companies use ICE cotton contracts to protect themselves against potential price fluctuations. For instance, a cotton producer might sell cotton through an ICE Cotton No. 2 futures contract to hedge against the risk of price declines at harvest time. Speculators also participate in this market, aiming to profit from price movements by buying contracts at low prices and selling when they are high.

What are the Advantages of ICE Cotton Contracts?

The advantages of ICE cotton contracts can be listed as hedging (price risk protection), price discovery, liquidity and standardization. Basically, ICE contracts allow producers and consumers to predict the change (i.e. risk) in the price of cotton and to protect themselves from price movements. The futures market formed by such transactions also helps predict the future price of cotton by providing information about the supply and demand situation. Thanks to the high liquidity created by active transactions in the ICE market, purchase/sale transactions can be carried out quickly and easily. The standardization of contracts also helps to prevent disputes among traders.

End of Downtrend?

We were looking for a trading opportunity in Cotton, which we have been following from ICE Futures since last month. With the USDA (US Department of Agriculture) lowering the world cotton production expectation from 115.29 million bales to 113.81 million bales, we started to look for suitable technical levels for purchasing.

 When we look at the Supply/Demand balance; We see that consumption expectations decreased from 109.01 million bales to 108.91 million bales, thus stock expectations decreased from 74.51 million bales to 72.39 million bales. The decline in world stocks caused ICE December contracts to jump 1.73 cents, or 2.45%, yesterday. When we look at ICE Cotton No.2 Options, we see that the volume of Call options with a target price of 71.15 for December maturity has increased.

Atlanta-based Knight Futures cotton analysts state that we may have come to the end of the bearish trend that has been going on for months. While USDA reduced its production estimates, it also reduced its crop planting estimates from 13.16 million acres to 12.64 million acres.

Technically, when we look at the monthly chart of cotton, a few points attract our attention. First of all, its current location, the 70.00 region (+/- 1 dollar), was visited in February 2010. The level, which was tested as a retreat from the first recovery following the 2008 global derivatives crisis, was also tried many times as support before the crisis. Another thing that caught our attention is the 'long black candle' in May and the subsequent 'doji' in June. The fact that these two formations come back to back is perceived as a return signal by analysts performing candle analysis.

When we look at the daily chart, we see that the 70.10 level has been tested and a triangle formation has formed on the daily chart. Since June's highest level is 76.15, we may have 2 courses of action. Purchases made at 70.10 levels can be followed up to 76 levels with a stop of 65 dollars. Another is that a stop can be moved to more northern regions by waiting for the break of the 76 level.