MUMBAI(Commoditiescontrol): The US cotton futures ended four consecutive losing streak on weekly basis and soared on heels of lower next season production estimates, robust weekly export sales and oversold technical indicators.
The benchmark May contract settled at 81.34 cents/lb on Friday, surging 5.4% over the week. Open interest as of Feb 22 showed 128,325 lots outstanding, up 7.5 % from prior week at 119,415 lots.
The front month March contract settled at 81.45 cents/lb on Friday, up 8% over the week. The delivery notice period began Feb 22 onwards hence trade activity scaled down considerably. Open interest as of Feb 22 showed 781 lots outstanding, down 18,360 lots(97%) from prior week at 19,141 lots.
Fundamental Factors Affecting Prices:
Two fundamental factors woke the bulls, namely, USDA outlook forum forecasts 7% higher sowing acreage at 13.3 million acres for 2018/19 season however production would be 8.3% lower at 19.5 million bales of 480lb(250 lakh bales of 170kg) due to higher abandonment rate at 15% on La Nina weather conditions in Texas High Plains. (Full Report)
The forecasts were close to the National Cotton Council(NCC) forecast of sowing area at 13.1 million acres and production at 19.42 million bales of 480lb(249 lakh bales of 170kg).
Logistic Issues Delaying Export Shipment:
The second factor was the fourth consecutive round of robust weekly export sales and shipments report. Net sales(upland+pima) crossed 400,000 Running Bales(RB), higher 10% from prior week, while shipments reached 354,774 RB for the week ending Feb 16. (Full Report)
However, there seems to be a serious logistics issues as truckers were restrained from working overtime as per the new legislation passed. Hence, there was a backlog of cotton deliveries to be fulfilled which was one of the reason behind sluggish shipments during Nov 2017- Jan 2018. There were speculations that there could be large backlogged shipments would be carried over to next marketing year 2018/19 and USDA’s export estimate of 14.5 million bales, lowered from prior 14.8 million bales would be believable. (Full Report)
Tremendous Support From On-call Sales:
Prices have now retraced 61.8% of the prior correction and could head to towards the 84 levels last seen during mid-January. There is a lot of underlying support in the form of trade short covering after mills begin fixing their outstanding on-call sales position between now and third week of June, a period of 4 months.
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The on-call sales position as of Feb 16, showed 14.08 million bales(480lb), down 0.2% from prior week at 14.1 million bales. The current season three contracts witnessed fixations as on-call sales in March dropped 68% to 0.29 million bales, followed by May dropping 5.7% to 3.3 million bales and July inching higher 0.1% to 4.155 million bales.
The on-call sales figure has further declined as March is out of the picture now since the first notice day began on Feb 22. So the on-call report for the week ended Feb 24 would be updated on March 1.
Taking March out of the equation, the two current crop on-call sales combined showed that around 7.45 million bales need to be fixed in the next 4 months or 120 days which is a large position providing the much needed support to the market. The position is lower compared to same period previous year where 8.04 million bales were left to be fixed.
Further, the on-call sales in new crop December 2018 was quite large at 2.8 million bales compared to same period where new crop December 2017 position stood at 1.55 million bales. Hence, the large shipment progress and on-call position would provide a good support for new crop December which last traded at 76.60 cents/lb and switch between July and December stood at 522 points on contango.
Cotton prices have found a good support at 75 cents and resistance at 84 cents with trend tilting towards the bull side.
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Technical Ideas(May): Traders long and holding the same can revise up the stop loss to 75. Last week, Cotton price traded above the Monday’s open and above 78.32 and as a result of which a buy got triggered above 78.32. The high registered subsequently was 81.42. Traders who were able to implement had the opportunity to benefit.
A big bullish candle was formed which suggest a swing bottom at 76.44 as higher low and higher high was formed with bullish candle.
Earlier the correction from 84.45 to 76.40 was in between the 50% and 61.8% retracement of the rally from 67.75 to 84.45. The price correction appears to be complete and look likely to move higher with volatility towards the peak of 84.45 and eventually towards 89 for completion of Wave (c).
Expect higher range of 82.85-87.31 to be tested with volatility. Since last week’s candle was large, intra-week correction could be witnessed to 79.91 or below. Weaker opening and correction first to 79.91-78.39 can be used for buying with a stop loss of 75.
The recent peak was at 84.45 and the same could be tested. On sustained rise and close above 84.50 with bullish candle expect a rally to 89. A larger pattern of (a), (b) and (c) is marked on the chart for reference and Fib-Proj. of 89 as well for Wave (c).
(By Commoditiescontrol Bureau; +91-22-40015534)
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