MUMBAI(Commoditiescontrol): The US cotton on the ICE futures witnessed the massive explosive bull move of which the market was anticipating and ended the week strong. However, disappointing WASDE report brought in spec liquidation.
The benchmark March contract settled at 81.68 cents/lb, on Friday, up 4.7 percent over the week. Open interest as of Jan 11 showed 168,863 lots outstanding, lower 2.7 percent from prior week at 172,818 lots.
The market witnessed major fireworks between Jan 10-12 as March prices rallied nearly 8.5% to a new contract high at 84.65 cents/lb and close to 8 month high on the continuous chart.
The bull was feeding on rising on-call commitments which as of Jan 5 rose to 15.64 million bales(480lb), up 1.4% from prior week and expectation of upward revision in US export estimates by USDA. However, the specs were left disappointed when USDA left US export figures unchanged at 14.8 million bales(480lb) for the 2017/18 season, along with minor downward revision in production figure of India. (Full Report)
This triggered spec liquidation from higher levels and finally prices settled at 81.68 cents/lb in the March contract.
However, this seems to be a correction post speculative bull rally and not entirely killing the bull steam. The main factor which has kept the bull in the game is the rising on-call commitments.
As of Jan 5, The on-call sales commitments rose 1.4%, WoW, to 15.64 million bales(480lb), trending on the historic high levels. The on-call sales were gradually phasing out in near month March contract as it dropped for the fourth consecutive week to final figure at 4.6 million bales, dropping nearly 20% from 5.6 million bales recorded on Dec 1.
During the same period, May on-call sales rose 12.4% to 3.34 million bales and July rose 15% to 3.55 million bales. It could be said that some mills were fixing their on-call position in the nearby March contract on every drop in prices which was supporting the market in the form of trade short covering.
However, majorly mills were stretching their fixing deadline and were rolling forward towards the next month May and July contract which was the reason behind rise in total on-call commitments. If we look at the overall position, around 74% of the on-call commitments were left to be fixed which is a massive position.
Similar to what we saw last season the short squeeze is in play and speculators will not likely back out until May or early June which is first noticed day of July contract. In 2016/17 season, the tug of war began prices were hovering around 68 cents/lb level around November and eventually rose to synthetic high of 88 cents/lb in May and dropped sharply to 71 cents by July.
The strong export sales report showed a ray of hope for shipments which was lagging during the last quarter of 2017. The surprising factor was that India which was the world’s largest cotton producer was the top buyer for the third consecutive week. Total commitments to India reached 0.54 million bales of 480lb(7.16 lakh bales of 170kg). (Full Report)
The strong net sales was attributed to US merchants selling low mic cotton at heavy discount. However, the recent jump in futures market to 84 cents/lb there is a possibility that it will choke off sales of even such discounted cotton and we therefore expect US export sales to slow down considerably unless the market backs off again.
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 bull rally to new contract highs at 84.65 has now created a strong resistance point and breakout of which could test higher range of 84.88-91.5. However, market is at a point of correction and can expect support levels of 81.45-78.26 to be tested.
However, this would be a temporal correction as the fundamentals are pointing towards a long-term bull move. Weaker opening and correction first to 81.45-78.26 can be used for buying with a stop loss of 77.
If price trade above the open and above 84.65 then trade long position with low of the week as the stop loss or 81.68 whichever is lower.
The up-retracement level of the fall from 80.2 to 65.03 is at 89.70.
(By Commoditiescontrol Bureau; +91-22-40015534)