Market Comments – November 1, 2018

NY futures rebounded this week, as December gained 137 points to close at 79.03 cents.

The market had another volatile week, as December traded in a 311-point range between 76.49 and 79.60 cents. The market felt really beaten up after Monday’s steep decline, as rumours about cancelled shipping orders and financial market concerns weighed on values. However, after successfully holding near 76.50 for three straight sessions and with the US stock market rebounding, cotton seemed to be waiting for an excuse to move higher.

Despite another disappointing export sales report this morning, which knocked December down to an intraday low of 76.53, it was a tweet from President Trump that flipped the switch back on for the bulls, as the market rallied nearly 300 points over the following three hours.

The tweet provided hope on the US/China trade dispute, as Trump stated that he had “a long and very good conversation” with the Chinese President and that “discussions are moving along nicely, with meetings being scheduled at the G-20 meeting in Argentina” later this month.

This set off a relief rally in heavy trading of 61k futures and 15k options. We assume that a lot of shorts were caught wrong-footed today, but there was also some new buying coming in from the sidelines. Open interest continued to increase, adding 5,013 contracts over the last five sessions to a total of 267,163 contracts as of this morning.

During October we have seen open interest increase by nearly 20,000 contracts, despite continued net long liquidation by speculators. Departing spec longs have been replaced by new outright trade and index fund longs, while new spec shorts swapped positions with trade shorts who covered. The nutshell version seems to be that trend-followers have cut their exposure to cotton, while fundamental traders have been net buyers, be it for cotton-specific reasons (fixations, constructive balance sheet going forward) or due to an inflation hedge or asset diversification strategy.

The CFTC report as of Tuesday, October 23, showed surprisingly little movement. The spec net long position was basically unchanged at 3.09 million bales net long (down just 0.02 million bales), while the trade increased its net short by 0.11 million bales to 11.36 million bales. Index funds were light net buyers, increasing their net long by 0.13 million bales to 8.27 million bales. 

US export sales for the week that ended on October 25 were once again slow, as only 69,400 running bales of Upland and Pima cotton were added for both marketing years. The main feature was another roll of Chinese commitments, as 88,000 running bales were moved from the current season to next marketing year. Overall sales to China were still a net positive though at 15,100 running bales. Shipments remained slow at 114,700 running bales, but that’s at least partly due to the lack of suitable grades in the pipeline. 

Outside markets finally found some support, with US stocks closing higher for a third straight session. However, the S&P 500 index closed last Friday below a 2-1/2-year uptrend line on the weekly chart and is now trying to claw its way back above it. It closed right at this trend line today and needs to move back above it soon in order to avert further selling pressure. While the stock market deserves the benefit of the doubt, we remain sceptical at this point and feel that this might be nothing more than a ‘dead cat bounce’ in an ongoing trend reversal.

So where do we go from here? The market made a nice move off the lows in heavy volume today, but we have seen these flash-in-the-pan rallies before. When we take a step back and look at the chart, we notice that December has settled the last 33 sessions in a fairly tight range of just 402 points, between 76.00 and 80.02. That dates all the way back to September 18.

While support looks quite solid in the 76.00-76.50 area, it remains to be seen whether the market can follow-through on today’s momentum and push through several resistance points that are located not too far above. The first one is the 80.14 high of October 22, then there is a cluster of previous lows between 80.60 and 81.20 dating back to Aug/Sept and beyond that we have the primary downtrend line at around 81.50 dating back to early June. Furthermore, there are the 50-day moving average at 79.29 and the all-important 200-day at 81.10 cents.

In other words, within 250 points above today’s settlement there are all kinds of important resistance levels, which if taken out could spark a strong move into the mid-to-high 80s. Let’s not forget that we are dealing with a lot of AI trading these days and computers will pull the trigger quickly and decisively if this cluster of resistance is overcome.

Next week should make for an interesting and potentially erratic market, as we have the US Mid-Term elections on Tuesday, followed by the WASDE on Thursday and options expiration on Friday. In addition to that the index fund roll period is starting mid-week. While we have no clue how this is all going to play out, given the choice we would still prefer to own the market in the high 70s than being short. Use options to operate in the current environment!

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