MUMBAI(Commoditiescontrol): The US cotton futures resumed consecutive weekly gains as it rose more than 2% supported by fresh buying by speculators amid rise in on-call commitments and a strong performing export sales report.
The benchmark March contract settled at 83.42 cents/lb, on Friday, up 2.1% over the week. Open interest as of Jan 18 showed 169,789 lots outstanding, higher 0.5 % from prior week at 168,863 lots.
The total open interest for all contracts reached record high of 304,637 lots surpassing the previous record of 302,683 lots as on March 3, 2008. The tug of war is in play whereby neither the trade shorts or spec longs were willing to give up. This is creating a rather huge bull bubble which is showing no signs of reaching its full potential.
The market is lacking sell side liquidity and deep pocketed speculators who continue to raise fresh long position may not give up easily unless a trend reversal or a big bearish news scare them away. Prices are gearing to breach the previous season’s tug of war high at a synthetic high of 88 cents.
A similar situation was seen during the 2008 season where the fundamentals were rather bearish and prices were hovering around 69 cents around the end of January period, after which the speculators indulged in fresh buying fueling price rally to synthetic high of 117 cents on March 5 and finally crashing to 69 cents by March 20.
The futures market has ignored most bearish fundamentals and focused on the large trade shorts, attributed to large on-call commitments and the ever growing spec long position which led to a record high open interest in futures market. Merchants(trade shorts) and mills(on-call sales outstanding fixers) have already resorted to hedge themselves by purchasing bullish option strategy.
The tug of war is in favor of the spec longs as trade shorts and outstanding on-call sales would have to fix their position sooner or later. Hence, they are not only in a fight against the specs, but in a race against the clock as well.
The latest CFTC report, as of Jan 16, showed the merchants/producers raising their net short position to 187,229 lots while managed money players raised their net long position to 108,778 lots.
Further, As of Jan 12, The on-call sales commitments rose 0.41%, WoW, to 15.70 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 fifth consecutive week to final figure at 4.31 million bales, dropping nearly 23% from 5.6 million bales recorded on Dec 1. |
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During the same period, May on-call sales rose 19% to 3.55 million bales and July rose 20% to 3.7 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%, unchanged from previous report, of the on-call commitments were left to be fixed which is a massive position.
Meanwhile, the consecutive week on week strong performance by the weekly export sales report is providing more fuel to this bull rally.
USDA weekly net export sales was recorded at 286,128 Running Bales(RB) for the week ended on January 11 which inched higher 2% from previous week's 281,192 RB. Net shipments finally crossed the 300,000RB levels as it reached 302,904 RB during the week (January 5-11) which inched higher 4% from previous week’s 290,146 RB.
As expected there were significant cancellations recorded at 66,300 RB however it unhindered the bullish futures market trend as prices settled higher at 83.42 cents/lb on Friday. (Full Report)
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.
There were nearly 22 sessions left for the first notice day of March futures contract, 14 session until March options expiry and 6 sessions until index fund roll over period to begin from Jan 30- Feb 15.
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Technical Ideas(March): The market has not yet breached the previous contract high/strong resistance level at 84.65 while it has not fallen below the low of 80.30, recorded post WASDE on Jan 12. This is indicating that there is still tremendous buying power left in the market.
The bull rally to new contract highs at 84.65 on Jan 12 has now created a strong resistance point and breakout of which could test higher range of 84.88-91.5.
Weaker opening and correction first to 82.66-81.38 can be used for buying with a stop loss of 77. Support will be at 82.66-81.38.
(By Commoditiescontrol Bureau; +91-22-40015534)
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