Futures market starts new calendar year on strong note

08 Jan '10

5 min read

The latest on-call report tells us that mills continue to hold out for lower prices. On January 1st there were 5.32 million bales of unfixed sales, up by over 100'000 bales net from the week before. So far the strategy to buy on-call has backfired on mills, as they have more than doubled their unfixed position from 2.6 million bales in early March, only to see the market rise from 40 to 73 cents since then. By increasing this on-call position to such a sizeable quantity they have created a tremendous amount of support under the market and are thereby defeating their own purpose.

So where do we go from here? From a technical point of view the market has sustained some short-term damage, with March closing today at its lowest level since November 18. However, looking at the daily chart we are still holding above the uptrend line dating back to August 27, which currently runs through around 72.50 cents. Likewise on the weekly chart, where the market could retreat all the way down to around 67.00 cents without breaking the uptrend line dating back to early March. While short-term momentum is negative and a further setback cannot be ruled out, we don't believe that this bull market is over yet. It may simply take a break and as we have pointed out before, we may need to see a change in the leadership from the speculative sector to the trade before the market is able to resume its uptrend. This is likely to happen as mills will use this break to fix some of their on-call sales and to buy additional supplies, which in turn will prompt merchants to buy short futures back. This should provide enough support to stabilize prices and to eventually turn the market around.

We believe that China will play a major role in the world market over the coming months, as domestic prices have remained at elevated levels in very active trading. The CC Index stands at over 99.00 cents, while at the Zhengzhou futures market prices are as trading between 104.00 and 113.00 cents. Today the September contract, which was the most actively traded, closed at 112.88 cents. It is therefore more than likely that Chinese mills will be ready to take advantage of any break that presents itself in the world market.

Summing up, we may see a period of consolidation between 70.00 and 75.00 cents in the near term, but we believe that old crop will eventually resume its uptrend and we expect prices to reach above 80.00 cents by the second or third quarter.

Plexus Cotton Limited

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