Market Comments – January 17, 2019

NY futures continued to move higher this week, as March advanced 152 points to close at 74.37 cents/lb.

After four weeks of base-building, the March contract finally broke through the 7400 resistance level today and posted its highest close since December 20. In the previous nine sessions March had posted daily highs between 7325 and 7392, unable to get past the 7400 hurdle.

We are not quite sure where the market got its strength from today, but looking at the moderate trading volume of 25k futures and 3.5k options, it appears that it was more a lack of selling than a wave of new buying that led the market higher. Also, during yesterday’s up move we saw March open interest decline by 2k, which hints at short-covering.  

As we have previously stated, there is a confluence of supportive factors that make it dangerous for traders to short the market in the low 70s. Export sales have definitely picked up in recent weeks, Wall Street has strong-armed the Fed back into a dovish stance and sooner or later we will probably get a trade deal between the US and China.

Furthermore, since we are currently flying blind in regards to US export sales, on-call sales and spec/hedge data, we could see some impressive changes once these government agencies are back in business. For example, the latest export sales report dates back to December 13, so imagine how the market would react if there were suddenly 1.2-1.5 million bales added to the tally. The longer the shutdown continues, the more significant these changes are going to be.

The market’s recent price action has improved the technical picture as well and since the market came off so fast in mid-December, there aren’t any major technical resistance points until we get into the zone between 76.50 (50-day moving average) to 77.50 (cluster of November lows). In other words, the market could advance quickly if some buying were to come in and/or shorts decided to cover over the coming sessions.

With the Fed accommodating Wall Street again and recent jobs data surprising positively, the US stock market has moved over 12% higher since Christmas and fears of a major selloff are gone for now. This more optimistic mood should help consumption and recent commentary from mills does indeed sound a bit more upbeat, which means that mill use might not dip quite as low as we had feared a month ago.  

However, we believe that if the market continued to rally, it would choke off demand for US cotton. Although sales have been strong in recent weeks, there are still plenty of low grades to get rid of and that can only be accomplished if cotton remains attractively priced.

Let’s not forget that ROW stocks are at a multi-season high and inventories in China are ample as well from what we hear. Therefore, with the next US crop looking bigger thanks to a great moisture profile across the cotton belt, no none wants to hold on to low grades, especially in the absence of full carry.

So where do we go from here? While we feel that the market has solid support at 72-73 cents, we are not quite sure what to make of its upside potential. While today’s break above 74 cents bodes well for a technical rally towards the 7650-7750 resistance area, we doubt that such an advance would be sustainable yet. The US needs to get rid of more low grades over the next couple of months before higher cash prices are warranted, especially in the face of what could be a 20+ million US crop in the making next season.

We remain cautiously optimistic but feel that the market is going to be in a range between 72-77 cents in the foreseeable future. 

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