Cleveland On Cotton: Rally Hits the Ground; Likely Hang in 81-89 Cent Range
Just as quick as cotton prices climbed to a 14 month high the entire rally was lost even quicker. What took a bit more than a week to build crashed back to earth is just two days. The demise was just as quick and fatal as the Sun melting the wings of the legendary Icarus.
The rally was promoted by 3 factors:
- Deteriorating crop conditions around the globe
- A record high long position initiated by fund longs
- Technicals screaming for higher prices with the breakout from a symmetrical triangle formation.
The breakout was a strong 7 cent plus rally, but the collapse was just as big and even far quicker. Too, the action once again demonstrated how the market gives second chances.
The market collapse began Sunday evening (8-18) when it became evident that prices had pushed far past demand and that the speculative buying had played out. Speculative buying was reduced to nil as merchants, neither able to buy physical cotton nor able to get grower fixations, were left without any selling power. With no selling, buyers were left to fall on the sword and that they did. Thus, it was the selling that became nonexistent and put an end to the speculative longs feast. Without any selling, and with longs holding only paper without any rights to cotton, the market was over ripe for a collapse.
Too, it was evident that the rapid price advance had left most demand behind. Chinese mills reported a total absence from the market, noting that the high priced local cotton was, at the new price activity, cheaper than futures. Yet, even at that, weekly export sales were actually surprising as some 81,000 RBs of Upland and 10,800 RB of Pima were sold during the 91-93 cent period. This week’s lower price activity has brought about more demand from mills, including Chinese mills
Just as the market gave cotton growers a second chance, it is now offering mills a second chance. While a trip down to 79-81 cents remains a possibility, the long term support near 82 cents continues to hold firm. Mills will likely begin buying in volume on any trade below 84 cents. However, there may be enough picking and scratching at the 84 cent area to prevent a drop below that level. Yet, do not discount another test of the 81-82 cent level.
Cotton prices have returned to their long term trading range and will likely remain within that 81-89 cent trading range for some time. Yet, we still need to closely monitor the events of Mother Nature. With an estimated 50% of the Texas High Plains planting abandoned, weather conditions in other regions and countries must be closely monitored. The December 2014 contract has slipped down to just a shade about 77 cents.
The ICE Dec and Mar contracts gave back 160 and 87 points on the week, respectively, as last week’s inversion between the two contracts gave way to partial carry. Well,