Amazing note for cotton market

27 Apr '09

3 min read

In a repeat performance of the previous week, buyers took advantage of a sharp early week dip to finish the week on an amazingly strong note. Cotton prices finished higher for the fourth consecutive week and the sixth time in the last seven weeks. Analysts have been taken back a bit as the last nickel of this ten cent run has been on declining open interest, indicating that most of the recent strength has come from short covering rather than new long positions.

Nevertheless, the lack of selling makes it a one way street at least for now as the market continues to take the path of least resistance. The spot May, which went into delivery last week, gained 176 for the week. May quickly became a non-event with quick resolution of the open interest and without delivery mystic. July cotton finished the week 201 higher at 5270. July cotton has not traded above 5310 since the first week of November 2008.

New crop Dec was 143 higher for the week at 5638 While most of this weeks gains were attributed to technical factors, bulls still took heart to another week of strong export sales and prognostications by the USDA attaché' in China that they expect a sharp increase in Chinese imports next year. Realistically though, the market has not reacted to many news items in almost 6 months.

It was encouraging that our Ag Attaché in China estimated that, based on improving economic conditions, Chinese demand for imports will jump from 7.35 million bales to 13.8 million bales next year. Additionally, they estimated Chinese consumption to rise more than 2 million bales. Traders must take note, however, these are rough preliminary estimates and not official USDA numbers And on that note, USDA will make it's initial estimates of world supply and demand numbers for 2009-2010 in their May report.

However, the world number will be an aggregate total since individual country-by-country estimates, other than US and China, wont be released until the June report. Otherwise, there was little fresh news for traders to hang their hat upon Loan redemptions this last month have been mind boggling with another 95,000 coming out last week.

This leaves just a little more than 1.1 million bales and more than half of that in Texas where bark and micronaire has been such a problem. Should China, India and Uzbekistan continue to withhold selling pressure, we could actually end the season with statistical tightness. Surprisingly, despite the back to back widespread rains, the US Drought Monitor this last week failed to show the expected relief from drought in West Texas. We are now only two weeks from the beginning of their optimum planting period.

These several factors probably help explain the tightening of the July/Dec differences. Technically, July cotton has exceeded my expectations and seemed to almost defy gravity as it continued to stair-step up to levels not seen since early January. Granted, the market looked anything but tired at the close Friday, but until July closes solidly above 5310, a correction back to 4850-4750 where both retracement and moving average support rests, should be considered reasonable On the charts, this last months dime run looks exactly like the one last December.

That was a 1,064 rally. As of Fridays high, the market had advanced 1,027 points. When the market paused to catch its breath in early January, the market set back 495 points very quickly. Interestingly, the same correction from Fridays highs would place July at 4783, right between the moving average and retracement support levels.

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