Now that we got the squeeze play out of the way, both the market’s psychology and momentum have turned negative. Fundamentally the market is still too high and specs can’t be happy with their current book. The market may therefore continue to go lower in order to find trade support, both from new business and fixations. We expect that level to be at around 7650-7700, maybe a shade above it.
Today’s powerful move in July was a wake-up call for the many trade shorts that still remain in the game. It has also put any further spec long liquidation on hold for now and we may actually see some specs come back into the market based on this performance.
The specs and the trade are in a game of chicken and it remains to be seen who ultimately has the stronger nerves. If speculators were to give up and let trade shorts out, then the July contract would probably remain in the mid-to-high 70s. At this point speculators have no reason to abandon their position based on what the chart tells them, but that could of course change.
Near-term momentum has turned negative and this may force the market a little lower over the coming sessions. However, we expect heavy trade-short covering tied to mill fixations in the 76-77 cents area. At this point we’d expect the long-term trendline near 76 cents to hold.
The fireworks in the May contract are probably over, since we started the day with just 6,030 contracts open and there were an estimated 5,660 Mays traded today. In other words there won’t be a lot left to liquidate! It also looks like the certified stock, or at least most of it, won’t change hands during the upcoming notice period.
Some traders wonder why the market has not reacted more positively to these excellent export reports in recent weeks. The answer is simple – it was massive spec long liquidation and new spec shorting that kept a lid on the market. The heavy spec selling has diffused an otherwise explosive situation for now. However, in a sense it has made the situation worse, because thanks to a falling market US export sales have continued to increase at a mind-boggling pace. A few more weeks of 150-200k bales in sales and the US will for all practical purposes be sold out!
From a chart perspective the market is at a razor’s edge, sitting right at the long-term uptrend line. At the moment the recent selloff is still to be viewed as a correction in a bull market, but a drop below this important support would change that and flush out some more spec longs. However, trade short covering would likely be there to absorb most of the selling. On the other hand, if the market were to hold over the next couple of session, the momentum could easily turn up again!
US prices remain competitive and both sellers (no carry with an inverted July/Dec spread) and buyers (attractive basis, high quality and the desire to keep spinning US cotton) have an incentive to keep sales going. As mentioned before, with less than 10% of total US supply still available, one would expect some rationing to take place, but this is one of the most uncharacteristic seasons we can remember.
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.