Prepared by Ira Epstein & Company

Cotton's technical and fundamental picture appears similar to that of several other markets: sitting on what appears to be solid technical support but fundamentally depressed. World supplies appear relatively abundant. Recent talk of global deflation due to numerous widespread economic problems (particularly in Asia) contribute further to a rather gloomy outlook for this market's upside potential. The chart could only look promising to a contrarian.

Does this leave us any reason to be bullish about this situation? I think so. First, in my opinion, you should discount the global deflation factor as being overplayed and already priced into the immediate future for this market. While supplies are currently abundant, El Nino remains a wild card here and demand has increased recently. Technically, this market has been bouncing off this current support level for about two years. But the contrarian's favorite indicator, the recent Commitment of Traders report, may hold the most interesting clue: commercials and large traders are very long, small traders very short and the biggest fish in the pond, Bill Dunavent of Memphis is playing his hand close to the vest.

My recommendation: Buy either March or May futures and manage risk with options–(Possibilities include selling calls in the 75-78 area or buying puts from 67-69.)

Bullish biased short strangles are also feasible but difficult to put on due to low option premiums on the call side. Outright buying of calls therefore appears more attractive than selling naked puts. Exact entry levels on any of these varies from day to day.

November 24, 1997Tim Zurick

Ira Epstein & Company

223 West Jackson, 7th Floor, Chicago, Illinois

Options

Spread Trading
Tiger On Spreads
Consensus National Futures and Financial On Line Index

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