US Cotton Weekly: On-Call Position & Rising Export Sale Feeds The Bull Move

MUMBAI(Commoditiescontrol): The US cotton on the ICE futures ended the 10 week long winning streak on long liquidation however sentiment remains bullish amid large on-call commitments and potential of export sales to cross 16 million bales(480lb).

The benchmark March contract settled at 78.01 cents/lb, on Friday, down 0.8 percent over the week. Open interest as of Jan 4 showed 173,532 lots outstanding, marginally lower 0.7 percent from prior week at 174,684 lots.

The dominating bulls, since November 15, have taken a breather as speculators booked profits from higher level throughout the week. Yesterday, the export sales was the only factor which could have kept bulls dominating and for spilt second it did as prices rose to intraday high of 80.04 cents/lb however witnessed sharp reversal to close at 78.01 cents/lb, incurring triple digit loss of 124 points from prior close at 79.25 cents/lb.

However, the rising on-call commitments which rose further during the Dec 23-29 week. The on-call commitments rose 0.7% to 15.42 million bales(480lb), reaching a historic high compared to previous week. The major chunk of outstanding on-call commitments is seen in March at 5.04 million bales(33% of total on-call commitments) followed by May at 3.19 million bales(21%) and July at 3.36 million bales(22%). This accounts to 75 percent of total outstanding calls to be fixed for this season and major of the merchants have hedged a short position until the mills who bought cotton on-call would fix the price.

Further, the ever-increasing export sales commitments which reached 11.53 million bales for the week ended Dec 29. But the highlighting factor is that the shipments have been lagging 40% and on the contrary the new sales were ahead 89% compared to the weekly averages required to reach USDA’s forecast at 14.8 million bales. (Full Report)

But from a position point of view the more bales that are sold, either fixed price or on-call (and fixed later), the more supportive it will be for the market.

The rising exports and on-call commitments have caught the attention of speculators who continued to increase their long position since November 14. The latest CFTC report, as of Jan 2, showed the speculators raising their net long position by 1.2%, w/w, to 99,537 lots(10.37 million bales) while trade shorts raised their net short position by 1% to 177,064 lots(18.44 million bales).

This has created the classic tug of war between spec long and trade shorts(mills fixation), neither of which have settled their position as of date. As long as the specs hold on to their longs, it will be difficult to generate enough sell-side liquidity for trade shorts to get out. The only factor which could revive the bears is the rise in certified stocks amid export cancellations as merchants would send thier unsold stock for delivery in the futures market.

There were some technical indicators which also fed on the speculative bull move as prices breached the key 200 Moving Average on November 20. Since there are no signs of trend reversal in the near term as the market is trending more on demand rather than the large availability of cotton.

Last season, technical indicators suggested a long term target to 90 cents and that happened during mid May when prices touched a synthetic high of 88 cents after which witnessed heavy profit booking. This season, the target has shifted to 95 cents and when this could happen is yet unclear.

These situations often end with an explosive move as shorts are being forced out, followed by a crash and burn, similar to what we saw in 2008.



Technical Ideas(March): The charts shows that higher range or resistance levels of 78.45-79.61-82.36 could be used to take profits and speculators have been heeding this advice during the week.

Traders holding long can maintain a revised stop loss at 77 and if prices fall below 77 then near term correction or sideways volatility could resume. If Friday’s close is above 80.10 with bullish candle then expect the rally to continue.

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