US Cotton Weekly: Tug of War Trade Setup Favoring a Sharp Rally To 90 cents

MUMBAI(Commoditiescontrol): The US cotton futures ended the week higher bolstered by Friday’s sharp intraday surge on account of lower than expected rain prospects over Texas and growing on-call sales report.

The benchmark July contract settled at 84.73 cents/lb, hitting a 7 week high on Friday and rising 1.6% over the week. Open interest, as of April 19, showed 129,406 lots outstanding, rising 7.6% from prior week at 129,406 lots.

Total open interest for all contract decreased 6.7% over the week to 258,755 lots as May contract heads to the notice day period commencing from April 24 onwards. The spread between May-July strengthened to 74 points on Friday from 5 points last week. The July-December straddle strengthened to 530 points versus 444 points last week.

Since February 23, the July contract has settled all but one session in a tight range of just 405 points, between 81.18 and 85.23 cents. The one session being the Chinese import duty leading to prices closing at 79.72 cents on April 4.

This week, prices maintained a sideways trend for 4 out of 5 sessions closing in a super tight range of 40 points except on Friday when prices closed to a 7 week high at 84.73 cents.

It seems that the large growth in on-call sales, which almost reached the historical high led to fresh buying spree and this would be confirmed on Friday’s open interest position to be released on Monday.



The on-call sales position(Where mills purchase bales on-call but do not fix prices and in turn sellers/merchants, hedge themselves creating a short position on the futures market), as of April 13, reached 16.03 million bales(480lb) up 7.7% from prior week at 14.96 million bales while was tad lower 0.2% from record high at 16.06 million bales as on March 15.

As of April 13, May contract dropped 20% to 1.3 million bales(480 lb) and July rose 3.7% to 5.114 million bales and new crop December increased 4.1% to 3.53 million bales.

The May contract on-call position has significantly lowered this week as the first notice day is commencing from April 24. This would be confirmed in next week’s on-call report.



Similarly, The CFTC report, dated April 17, showed Money managed players increasing their position 5%, over the week, to 80,111 lots and remained higher 21.1% from previous lows at 66,146 lots. On the other hand, the trade shorts rose 2% to 166,132 lots as on-call position rose to near historical highs.

Feeding on the bullish bias is the robust weekly export net sales which reached 524,900 running bales(RB) for both marketing years. Shipments for the current MY showed slight sluggishness at 371,275 RB, during the week (April 6-12) which declined 27% from previous week’s 512,064 RB. (Full Report)

Statistically we could make the case that the US is now basically ‘sold out’. Out of a supply of 23.75 million bales (beginning stocks + crop), the US has so far committed 19.75 million bales (16.4 export + 3.35 domestic) for shipment and/or consumption until the end of July.

Then there are a further 3.2 million bales in export commitments for August onward, while 0.9 million bales are needed to tie US mills over to new crop. If we sum it all up, we get to just about a square position. We realize that the calculation is more complicated in reality because of the quality mix as well as exisiting stocks vs. new crop considerations. But needless to say, it’s getting tight!

Assuming that speculators are not going to bail out of their net long anytime soon given the more optimistic outlook for commodities, it is difficult to envision how mills will escape their fixation trap. Similar to what happened last season, mills have been kicking the can down the road, but they are now reaching a dead end since rolling to December is not a realistic option.

A year ago the July contract had closed at 78.32 cents on this date and four weeks later it topped out almost 10 cents higher. The current setup is quite similar if not more bullish, so we wouldn’t be surprised to see July reach new highs over the coming weeks.

In the week ahead, merchants will focus on closing out whatever May futures remain on their books by Monday’s end to avoid taking physical delivery. Traders continue to monitor the weekly export sales report to keep track of demand.

Attention is pivoting to new crop, and crop progress is joining the weather forecasts in traders’ daily analysis of potential production for 2018-19. Still, it may well be rains across West Texas (or lack thereof) this weekend that shape the majority of next week’s trading action.



Technical Ideas(July): Traders long and holding the same can maintain the stop loss at 81. Expect higher range of 85.72-88.58 to be tested.

Further breakout and close above 85.83 is essential. Weaker opening and correction first to 83.84-82.86 can be used for accumulation with a stop loss of 81.

Once the breakout above 85.83 is successful then expect a rise to 90 or above.

(By Commoditiescontrol Bureau; +91-22-40015534)