The great fundamental that wreaks havoc on any market did just that to the cotton market all week. That ole market adage, “when you go to bed with the government you usually get more than a good night’s sleep,” was the primary market factor all week.
The market was up 100 to 200 points one day then down near the same the next. However, prices did end the week with a strong uptick, almost touching 81 cents and closing the week above 80 cents.
The technicals literally remain neutral. First the market is attempting to hold above 80-81 cents. Yet, given the market’s reaction to “government” fundamentals, we still face the danger of trading back toward 76 cents. Yet, the market must firmly hold the 78-79 cent level if upward price momentum is to be established.
The massive overhead resistance above 84 cents continues to keep a lead hat on the market, but it remains encouraging that prices have seemingly found the 81cent level very pleasing. Nevertheless, the tariff situation, coupled with the “spy gate” theft of technological secrets by China, is now playing out not only in the equity market, but in all commodity markets as well.
This macroeconomic activity is affecting commodities in a very negative way because it raises government to government tensions to a very unsettling level. Traders will have to clearly see that there is some specific advancement in negotiations with China before price stability can return to the market. Certainly, there have been more volatile trading activities, but the daily triple digit market moves and lower trading volume have caused many traders to sit on the sidelines. Supply factors are definitely bullish, but demand remains a bit weak.
Adding a bullish note is the Indian crop situation discussed with you on several occasions. We now find that more and more analysts are buying into our discussion that Indian production for 2018 will be some 2-3 million bales lower than the current USDA estimate of 28 million bales. Thus, world carryover stocks will fall possibly as low as 69 million bales, or as much as ten million bales below the year ago level. Too, this lost export opportunity for India will begin to spur U.S. export sales.
With world carryover declining, a bullish scenario can now be debated for the March 2019 through July 2019 futures contracts. Cotton supplies, particularly high quality stocks, are extremely tight. Yet, the new crop plantings are expected to explode in 2019 to 14.4 million acres, or 400,000 acres more than 2018 plantings. The March and May 2019 contracts can be expected to drag the December 2019 contract up as high as 80 cents.
Cotton prices continue to be stuck in the middle of a 75-84 cent trading range, but recent trades above 80 cents have wetted the bull’s appetite. Tariff issues will remain the key element of price activity as non-U.S. cotton is currently at the center of world trade. This week’s trading above 80 cents does appear to have established a firm bottom at 75 cents. The market will continue to build its bullish case, but there will be price setbacks.
All roads point to higher prices excepting for the tariff issue. U.S. cotton will move in the export market. Yet, as said a couple months ago, this market has some more pain to give.
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