The market remains boxed in for now, with the upside being contained by residual producer selling and the inability by specs to add a lot more to their net long, while the downside sees solid support from trade fixation buying and short-covering in connection with basis-long sales by merchants.
Cotton still seems to be locked into a sideways range for now, with over 10 million in unfixed on-call sales acting like a 3-cents layer of cement underneath the market, which is difficult to get through, while upside momentum is somewhat limited by the record spec long and the unwillingness by the trade to chase values higher.
The irony is that by being bearish and therefore buying almost all cotton ‘on-call’ in recent months, mills have created a potentially bullish monster! There are now nearly 10 million bales that have been bought but not priced yet and this represents a tremendous amount of buying power. The hope is of course that the specs will oblige and eventually sell out of their 11 million bales net long position, which would allow mills to fix in a falling market. But what if speculators were to sit tight?
Both from a fundamental and a technical point of view the market seems to be ready for a much-anticipated correction. However, we feel that a dip towards 68/69 cents would be met by aggressive trade short covering and may therefore be short-lived. We don’t see a major flush out of spec longs at this time and feel that the trade is in a weaker position with all its unfixed on-call sales.
With December fixations out of the way, the market seems to be ready for a pullback. However, there is plenty of trade buying to be done and for this reason we feel that the market doesn’t have a lot of room to the downside, unless spec longs were to pull out of their positions. We therefore feel that a pullback towards 68/69 cents would have a lot of support and should be bought!
Friendly short-term fundamental and technical factors combined to create a perfect bullish storm this week that jolted the market out of its sleepy sideways mode. However, supply constraints in India and China are temporary and once these situations normalise, the world will have plenty of cotton to choose from.
The market has been moving sideways for about 3 months now, but in doing so it has been forming a ‘flag’ with higher lows and lower highs, from which it will eventually break out. The current boundaries of this flag formation are roughly 68 and 71 cents. A move below or above these levels would likely trigger a reaction by speculators.
While from a fundamental point of view a continuation of the 67-72 cents trading range still makes sense for all the reasons we have already discussed, macro events could exert their influence on cotton over the next week or two. We therefore believe that it makes sense to take some risk off the table and adopt a wait and see attitude next week.
With speculators digging in on the long side, some trade shorts have their backs against the wall as they are running out of time on their Dec fixations. Unless specs somehow get spooked out of their positions, the market is likely to remain on a firm footing as we head into the index roll, options expiration and Dec fixations.
We believe that the market is still in a 66-71 cents trading range, with mill buying/fixing providing underlying support and grower selling forming resistance. Specs are already quite long and seem to have limited firepower to force a decisive move to the upside.
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The market is still locked into a trading range, with solid underlying support from 8.3 million bales in unfixed on-call sales, while origin selling above 70 cents seems to keep a lid on it for now.
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The market continues to be locked into a tight range, with 65/66 cents providing solid support for now and 70+ cents representing resistance.
We still feel that the market remains range-bound between 66-72 cents. On-call sales rose once again last week and now amount to nearly 7.7 million bales, which should provide a decent layer of support between current levels and 65 cents.
The market has quickly moved to the higher end of our perceived 66-71 cents trading range and it remains to be seen whether it can keep the momentum going. What speaks against it is that specs are already quite long, while the trade doesn’t seem to panic into covering shorts. The crops in China, India, Pakistan and the US are doing fairly well at this point and as long as that remains the case, we don’t see any reason for the trade to chase prices higher.
The CFTC report of last week showed that the recent price spike was mainly due to spec short covering rather than new spec buying. Specs are already 8.3 million bales net long and therefore don’t have as much firepower to force the market higher. Even if speculators were to buy another 3-4 million bales net, grower selling would probably be there to absorb it now that the crops are about to move in.
As mentioned last week, we believe that support underneath the market is rather solid at around 66-67 cents, due to the 6.99 million bales in unfixed on-call sales and pent-up demand for nearby shipment. Resistance is more difficult to ascertain, but we feel that at 71/72 cents the market will start to struggle from a fundamental point of view, unless there are some last minute setbacks on the supply side.
Over the last two years cotton prices have spent most of their time in a 60-68 cents range, with the exception of a few short spikes below 60 cents and the recent rally above 68 cents. Mills have become quite accustomed to prices in the mid-to-low 60s and we therefore expect to see very strong support in that area.
Speculators still have a considerable long position of over 7 million bales net, but the trade is twice as many bales net short. Index Funds, which are just under 7 million bales net long, are not reacting to price movements. It is therefore a question of ‘who has more urgency to act’? Specs longs are at or below their break-even point and may want to further reduce their exposure. However, unless they do so in a hurried manner, there seems to be enough trade buying to absorb any selling at the moment.
So far the market has been able to close above the 5-1/2-month uptrend line dating back to late February, which is currently running through around 67.80 cents. This has kept most of the spec longs in the game, but a close below this trendline would probably flush out a large percentage of these longs.
Spec longs got the wind knocked out of them over the last few sessions and are now hoping for the WASDE report and mill fixations to keep the market from caving in further. However, with the weather situation improving, a trade short covering rally is less and less likely, which could leave the nearly 10 million net spec longs exposed.