While most of the bullish drivers that have brought prices from about 56 cents to 77 cents since last March are still in place, particularly the large trade short position tied to a massive amount of unfixed on-call sales, we feel that this bull market is living on borrowed time! If specs hold on to their longs, they could still force the market to spike higher over the next three months.
The market continues to be in a holding pattern, waiting for the nearly 8 million fixations in May and July to make their move. Mills didn’t want to fix when the market was below 77 cents earlier this week, so why would we expect them to do so at over 78 cents? However, sooner or later they will run out of time and that’s when things will get interesting! From a technical point of view the market is still in a strong one-year uptrend and there are no signs of a spec long shakeout anytime soon.
From a technical point of view the 53-week primary uptrend is still in force, which is keeping speculators on board. The trade on the other hand seems to be trapped with its large net short position, about half of which is against unfixed on-call sales. Mills are growing increasingly frustrated with this ‘two steps forward – on step back’ market since they don’t seem to catch a break that would allow them to get out of their predicament.
Speculators and the trade continue to hold historically massive long and short positions. Although the market has seen some wild up and down moves lately, it hasn’t really gone anywhere over the last four weeks.
After some light spec liquidation last week and a drop in futures open interest from 28.8 to 26.1 million bales, the market has stabilized and is finding strong underlying support from mill fixations.
There have been two forces at work in the market over the last couple of weeks. On the one hand we had mill fixations and spec buying push prices higher, while an increasing certified stock has forced carry to widen between current crop months.
The market felt heavy this week, as it lost its upside momentum and threatened to sell off into the low 70s. However, when we take a step back and look at where the market sits today, we notice that it is still only a little over 200 points below the August 2016 high of 78 cents. Beyond that we have to go all the way back to May 2014 to find higher prices. Although the market took a breather this week, the uptrend on the daily and weekly chart is still very much in force.
Unfortunately not much has changed since last week, except that mills have five days less to get their March fixations done. The massive open interest and the near record unfixed on-call position should continue to support the market going forward and there is still a strong possibility that the market might spike to 80 cents or beyond on last minute short covering.
Another week has passed and mills have not made much headway with their March fixations. This means that there is less time left to get more than 3 million bales fixed, or rolled, which makes this market dangerous.
From a fundamental point of view there should be plenty of supply to comfortably last into the coming season and new crop plantings seem to be increasing in several places, including the US, India and China. In other words, the mid-to-long term outlook is shaping up to be bearish!
Today’s break of 72.75 cents support (former resistance) has opened the door for some further downside in the sessions ahead, but we feel that there is a lot of trade buying waiting in the 71-72 cents ‘fixation zone’. Since we don’t see a major flush-out of specs longs, we feel the market will hold above 70 cents, regroup and eventually reverse higher again.
Spec longs have sponsored this latest push higher, while scale up grower selling has managed to keep the advance in check. However, mills have so far been conspicuously absent, judging by the rising open interest and the latest on-call report. This means that most of these mill fixations are still ahead of us and this could lead to additional spikes over the coming weeks.
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.