Cotton futures (ICE Futures U.S. CT) opened nearly 2¢ lower on Wednesday, marking a 13-week low. Cotton then staged a large rally, closing 171 ticks off the low, though still down on the day. The strong move off the extra big down opening begs the question "did cotton just bottom?" As the futures have been in a significant downtrend for since early March.
Q: In the Second Quarter, what happens when Cotton opens down extra big (or very close to it) yet closes above its open?
A: We've seen seven completed instances of rallies open to close following large gap downs. Cotton has managed to tread higher all seven times for an average return of 2.61% with a standard deviation of 2.13% and a Sharpe ratio of +1.22.
Jason Thompson is a Chicago-based speculator focusing on electronically traded derivatives and their underlying instruments.
