Morning Futures Roundup

Are Bearish Fundamentals Finally Unraveling The Recent Cotton Rally?

    Fundamentals
Many cotton bears were caught by surprise last week, as quality concerns with this season's U.S. crop and tight exchange warehouse stocks sparked a price rally to 5-month highs. A slow pace to this season's Cotton harvest sparked concerns that deliverable supplies against the December futures could be tight.

In addition, much of the newly harvested Cotton has been of low quality, which would make it ineligible to be tendered against the futures contract. Chinese Cotton exports also have been better than anticipated, with 4.03 million tons of Cotton imported for the first nine months of 2012, which is more than double the amount imported last year.

Short-covering by commodity funds sent prices soaring and moved the Dec./Mar. futures spread into a backwardation, as concerns of a possible "short squeeze" during the delivery period entered market many participants' thoughts. However, despite the recent bullish news, both U.S. and world Cotton stocks are expected to be burdensome, with the USDA anticipating record U.S. Cotton carryover going into next year.

Some analysts expect the recent price rally will be short-lived, especially if hedge selling by commercial traders occurs, which appears likely as prices move towards 80 cents per pound in the front month futures. Current new-crop (2013) prices below 80 cents may discourage large Cotton plantings next year, as many producers look towards more attractive products, such as Soybeans, next season.

However, even with lower Cotton acreage, the U.S. may still see huge inventories of Cotton in 2013, unless weather issues severely hamper production or world exports increase sharply due to this season's expected carryover totals.

   Technical Notes
Looking at the daily chart for December Cotton, we notice the series of limit-price moves that were triggered by concerns of a "short squeeze" in the December futures due to low exchange certified stocks. The limit-move sent prices above the 20-day moving average, which triggered "buy signals" for many short-term trend-following trading systems. However, a selloff in equities on Tuesday spilled over into the commodity sector, which sent Cotton prices briefly down the 3-cent limit.

The 14-day RSI has turned neutral, with a current reading of 51.44. Many speculators added to their net-long positions last week, with the most recent Commitment of Traders report showing a combined increase in non-commercial and non-reportable positions of a combined 12,004 contracts as of October 16th. The next resistance level appears near 80.00, where we see the 200-day moving average currently hovering. Support is found near 72.65.

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About Mike Zarembski

Born in the grain pits of the Mid-America Commodity Exchange (MidAm) in the early 1990s, Mike's futures career soon shifted to the offices of TD Waterhouse in 1999, followed by Xpresstrade in 2002 and eventually optionsXpress in 2007.