While the US faces losses and quality problems in the Southeast, which accounts for about a quarter of US output, the global economy is confronted with an emerging market crisis, trade disputes and as of yesterday jittery stock markets. While both developments have the potential to move the market, we feel that fear of lower mill use in the wake of all these economic problems carries the greater weight at this point, especially when it comes to speculators, who seem to turn their backs on industrial commodities.
Although this listless market seems to suffer ‘death by a thousand cuts’, as speculators are leaving the game and the cash market feels anaemic, we believe that things are going to get a lot more lively as we head into the final weeks of the December contract.
It is important to point out that the recent weakness in the market was mainly caused by new spec short selling, after the market broke through the 200-day moving average. Although spec longs have been gradually reducing their long exposure since early June, there has been no panic selling on their part yet.
After we saw some weakness in fundamentals recently, the technical side followed suit this week by crashing through key support. For now it looks like this was just a necessary washout that realigned futures prices with reality. The fact that open interest held relatively steady, export business picked up and that there were still 15 million bales to fix as of last Friday gives us some confidence that the market has simply moved to a lower trading range of somewhere between 76-81 cents, rather than the beginning of a cascade in prices.
The market still seems to be trapped between strong support and resistance areas. With unfixed on-call sales still at 14.97 million bales as of last Friday, of which 3.71 were on December, there is still a strong layer of support underneath the market.
So where do we go from here? For now there is still plenty of support underpinning the market. The 14.95 million bales in unfixed on-call sales, the Indian MSP (Minimum Support Price) and the 200-day moving average at 80.00 cents act like a dam that holds the market back. However, these emerging market problems are like cracks appearing in this dam and only time will tell whether they can be repaired or whether there will eventually be a breach.
The market has very little momentum at this point and given the statistical situation this is not expected to change anytime soon, unless something were to drastically change in the supply/demand outlook. With crops about to come off the fields, supplies should be plentiful for a while and a potentially bullish scenario will probably have to wait until the 2019 planting season.
Markets don’t like uncertainty and at the moment there is plenty of it, which is why we believe that speculators will continue to reduce their net long holdings, while mills will continue to fix on a scale down basis.
From a technical point of view the market has broken through all kinds of important support levels this week, starting with the long-term uptrend line at around 8400 and then the July low of 8175. The last line in the sand is the 200-day moving average at just over 7900, which is often used as an important tool by long-term speculators. So far spec liquidation has been moderate, as open interest has only declined by about 10k to 261k, but the market needs to quickly prove itself if it wants to avert further damage.
Improved conditions in West Texas and the US/China trade standoff have weighed on the market this week, but the slightly higher open interest suggests that it wasn’t liquidation that forced prices lower. Instead it was probably an absence of buying that allowed the market drift south, as the 15.6 million in unfixed on-call sales (5.2 million in December alone) are still adopting a wait-and-see attitude.
Support looks quite solid in the mid-80s, as the US cotton pipeline will basically be empty by the time new crop arrives, mills have a massive amount of fixations to do, global stocks are decreasing, inflation is increasing, specs and index funds seem to have staying power and demand remains robust. It would therefore take a geopolitical or economic event to flip this market on its head.
Not much has changed since last week, as most traders remain sidelined. Mills are still hoping for another dip into the low-to-mid 80s to get some of their fixations squared away and are therefore not in any hurry to chase prices higher. Speculators are not active either in this dull market and are waiting for new momentum before jumping back into action.
The low volume shows that the major players remain sidelined for now. After last week’s rebound speculators have no reason to abandon their long position, while trade shorts are patiently waiting for a break in prices. Until something changes the status quo, we anticipate more of the same boring sideways action. Support seems to have moved up to around 84/85 cents, while resistance is at around 89/90 cents. Expect the market to trade within these boundaries in the foreseeable future!
The old adage to “never short a dull market” proved once again to be true . The market has held crucial support near 82 cents and then started to lift off. This means that the spec long, which still measured 9.0 million bales net as of last week, is likely to increase again. Meanwhile trade shorts are kicking themselves for letting another opportunity pass by and some traders are starting to fear this market.
The market’s focus is currently on the US/China trade dispute. So far we have seen the stubbornly high open interest as a bullish argument, as spec longs have shown resilience despite spot futures dropping from 96 to 82 cents over the last four weeks.
After moving sideways for a week the market broke through its 50-day moving average today, which triggered some more sell-stops. However, from a longer-term perspective the market is still within an uptrend channel dating back to October, with its current boundaries roughly between 81 and 85 cents.
The fact that open interest has remained so stubbornly high during this break could mean two things: 1) Either massive spec net long liquidation still lies ahead of us, which could force the market substantially lower from here, or 2) Specs as well as outright trade longs are giving the market a lot more rope than we thought, which could eventually swing the pendulum back the other way, as fixations and trade shorts begin to pay up. There are currently 14.13 million bales in unfixed on-call sales on the books for December onwards!
Last week we had our doubts as to the trade’s financial ability to increase its short position further, but so far the trade has been determined to keep the fight going.
The speculative net long position continues to grow and is probably at a new record at this point. The trade net short, as well as the outright short position, are also approaching record levels, second only to the spring of 2008, just before the market went parabolic.
The market’s narrative seems to be that while some July shorts might still get squeezed, this isn’t really about July anymore, but rather a shift towards a more bullish market environment in 2019. China will eventually run out of reserve stocks and is therefore expected to increase its imports considerably. Combine this with some problems on the production side, strong downstream demand and an inflationary outlook, and we have the pieces to a bullish puzzle.