NY futures ended the week slightly higher, as December gained 49 points to close at 69.80 cents.
It was an interesting week, as the market first seemed to advance on trade short covering and then got a boost from renewed spec buying. The December contract managed to rally 503 points over the last seven sessions, going from an intraday low of 66.76 cents on October 12 to today’s high of 71.79 cents, before profit-taking and sell-stops knocked prices back below the 70 cents mark.
It seemed to be trade buying into spec selling that started the ball rolling after the WASDE report, since open interest declined during the first phase of the advance. This hints at mill fixations and sales of basis-long positions by merchants as the likely source behind the buying.
Then, during the second part of the rally we saw a big increase in open interest, with total open interest expanding by an impressive 14,089 contracts or 1.4 million bales between Monday and Wednesday. This suggested new spec buying into trade selling, as growers were taking advantage of this latest move above 70 cents.
Despite this massive increase in open interest the market managed to gain only 53 points over three sessions, which was a sign that this move was stalling. Although today’s excellent export sales report provided the market with another quick bounce, it was all downhill from there as the market fell into a void of buying and sell stops got triggered.
Once December traded near 69 cents, mill fixations started to show up in greater numbers, allowing the market to stabilize and rebound going into the close. It seems to us that the market is still trapped in a seesaw between support from mill fixations and new export business in the mid-to-high 60s and overhead resistance from grower selling above 70 cents.
Speculators are tipping the scales in this back and forth trading action by entering and exiting positions based on momentum and chart patterns. Right now the chart seems to be forming a ‘double top’ since December was unable to take out the September 22 high of 72.36 cents. Unless the market is able to quickly recover today’s losses, the next logical stop on the chart seems to be support near 67 cents.
Today’s export sales report met high expectations, as total sales of Upland and Pima cotton amounted to 345,300 running bales, with China (199k) leading a field of 22 buyers. Shipments of 132,500 running bales are still lagging at this point, as old crop supplies have mostly been shipped by now and new crop is just moving in. We expect a sharp increase in the pace of shipments over the coming weeks. Total commitments for the current season are now at 6.05 million statistical bales, of which 2.0 million have so far been exported.
A lot of these export sales continue to be made ‘on-call’, as the latest report by the CFTC shows. As of October 14 there were 8.41 million bales still to be fixed, of which 2.15 million bales were in December. That translates into a lot of support underneath the market and time is starting to run out for Dec fixations.
This large on-call position also tells us that mills don’t really believe in higher prices, otherwise they would have bought predominantly at a fixed price. Indeed, from what we hear yarn business has been slow in many places, with mills complaining about slow off-take and profit margins being squeezed.
So where do we go from here? As already stated, 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.
Longer-term the size of US and global production is likely to weigh on the market, as we feel that the US crop has greater potential than the USDA report indicates, while India, China, West Africa and Australia are also looking to come in slightly above the current WASDE numbers.
With its large open interest of 25.7 million bales the futures market is likely to remain volatile, especially as we head into the index roll, options expiration and Dec fixation period over the coming weeks. We therefore expect to see more price spikes and selloffs over the coming weeks, but from a fundamental point of view the pivot seems to be at around 68 cents, which translates to a landed Far East value of around 80 cents for high grades.
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