After being up seven consecutive days and nine of the past ten days, cotton futures corrected on Friday, falling 237 points on the week’s final trading day. Nevertheless, the market was up nearly 200 points for the week. The nearby March climbed to a high of 84 cents before the correction and settled the week at 80.52 cents. Thus, the market chalked up an 80-point rally before the correction.
The Friday correction was good for the market as it allowed speculative funds to take profits and walk away feeling positive about cotton. Those funds will be back in the market, with even more ammunition, and set to lead the New York ICE contract to challenge the 85-86 cent target. Much of this rally was built around the fact that funds had built the largest speculative long position since 2010 and nearly twice as much as at any time in 2012. Naturally those speculative funds have traded on the basis of the very favorable technical indicators, including the inverted head and shoulders formation in late December 2012. Those indicators, we have discovered, were the result of the rekindling of demand that began in the July-August-September period.
Demand continues as the driving force behind the price advance with the next objective sitting at the 85-cent level. A taste of the battle in the advance to 85 cents was evident in the week ending Friday, as the market failed at the 84-cents level, thus adding a stiffer barrier on the next attempt to run above 85 cents. Yet, the failure to move above 84 cents can also be viewed as a positive market response to the rapid and unhindered charge from 80 cents to the 84-cent level. We had cautioned earlier that a vacuum of selling would exist once the market rose above 80 cents.
The same conditions led to the current rally: Chinese government “locking up” much of the crop in its reserve; Asian and Subcontinent mills exporting yarn to China in record volume; the consumers’ return to the retail market and their thirst for cotton goods; the limited volume of quality cotton; the disruption of normal global weather patterns (notably in the United States and India); the unfavorable price ratio of cotton and its competing crops; and that textile mills are uncovered for too much of the second quarter needs– and are even less covered for the remainder of 2013.
Cotton plantings will continue to lag in 2013 and this, coupled with mills beginning to cover some of their 2014 needs, will keep the new crop December enjoying higher prices as well.