The battle between spec longs and trade shorts has turned more even this week, as the market yo-yoed back and forth in volatile fashion. After the parabolic move to 84.00 cents last Thursday, the March contract corrected to a low of 80.18 cents over the following two sessions, from where decent support lifted values back up towards the 83 cents level. Tuesday’s attempt to take out the 84.00 high has been unsuccessful, which was seen as a minor victory for the bears.
However, even though the spot contract seems to stall, May (+195 points), July (+240 points) and December (+142 points) all posted new 8-month highs this week, both on an intra-day as well as on a closing basis. This is not insignificant, since in about two weeks May will take over from March as the lead month.
Overall open interest continued to increase, albeit at a slower pace, as it rose by 7’705 to 205’445 contracts over the last five sessions. This is the highest reading since late October, when open interest topped out at 208’031 contracts, and before that we have to go all the way back to the historic bull market of early 2011 to find larger bets in the futures market.
While March open interest dropped by nearly 7’000 contracts, May (+10’000), July (+3’000) and December (+2’000) all saw decent gains in their outstanding positions. This tells us that trade shorts are digging in, not willing to throw in the towel just yet. If anything, they keep increasing their 13 million bales net short position rather than covering it. In order to back up their bets, shippers have been busy adding to the certified stock this week, which is now at almost 167’000 bales if we count bales under review. This is the highest the certified stock has been in 19 months and it is likely to get even larger as we approach first notice day.
At 83 cents the futures market is currently outpacing the cash market and it is rendering Chinese imports at the 40% duty level too expensive. Also, there have been rumors that merchants are trying switch some US sales to other origins in order to free up cotton for delivery in New York. In other words, it looks like the bulls are starting to run into some headwinds that may make it difficult to keep the upside momentum going.
US exports sales have slowed down somewhat last week due the firmer market, but they were still fairly impressive at 158’400 running bales for Upland and Pima combined. There were still 17 markets on the buyer’s list, but what spoiled this otherwise good report was a cancellation of 50’300 bales of Upland cotton out of China, which more than offset new sales of 39’100 bales to the same market. Shipments of 291’300 running bales remained above the pace needed to reach the current USDA target of 12.2 million statistical bales. Total commitments for the season now amount to 10.4 million statistical bales, of which 4.8 million bales have so far been exported.
So where do we go from here? From a technical point of view the market has started to flag sideways, and this congestion pattern will soon be resolved by March either taking out the 84.00 cents high or by breaking below a near-term uptrend line that runs through around 82.30 cents at the moment. If this uptrend line is broken, it will probably send the specs to the sidelines and preclude further upside momentum. Given what we currently see on the fundamental side (Certified stock increasing, futures above cash price, Chinese holidays approaching, index fund roll), we feel that the odds are in favor of a correction. Such a setback could send the March contract down to somewhere around 78-80 cents and it would likely bring carryings back to the board.
