NY cotton futures breaks psychological barrier

With the Chinese Reserve once again absorbing a lot of new crop cotton (nearly 600’000 tons so far), free supplies within China are relatively tight and since Reserve auction sales may get delayed until early next year, buyers may be forced to pursue imports. Remember, cotton can be imported without a quota if the full 40% duty is paid! Based on our calculations it would seem that such imports become feasible once the futures market trades in the mid-to-high 70s.

Based on momentum indicators like the RSI and Stochastics the market looks quite oversold at the moment and we should therefore expect a bounce to occur at any time. Specs are likely to use rebounds to add shorts and/or lighten up on longs, but on the other hand it may prompt mills to buy and fix additional supplies.

Former support at 81.71 in December has now become resistance and we see it as unlikely that the market will settle back above it anytime soon, due to increasing harvest pressure. At best the bulls may hope for a 3-5 cents lower trading range, but we wouldn't rule out a further drop towards 75 cents unless China shows up as a strong buyer.  

Plexus