The cotton market is trading more congested than normal as optimism is fading for a quick resolution to the U.S.-China trade war. News accounts are now saying a March settlement is out, and more likely it will be June before the two sides can sign a deal. Although each side publicly touts great progress has been made, a huge sticking point is oversight and enforcement of the newly designed trade rules. Thus, the market trades in inches.
There is something of an internal dichotomy occurring within the market. This twist revolves around tightening old-crop stocks versus the potential for big increases in the new-crop stocks. Naturally, the key for greater stocks in 2019 is normal weather. This anticipated weather fundamental has speculators heavily net-short, if not record net-short, for this time of year.
To that end, the commitment of traders report as of March 21 shows index funds (managed money) net-short 20,000 contracts after net selling an additional 1,700 contracts for that week. Ordinarily, speculators rarely fade cotton’s historical seasonal, which says prices typically rally into spring planting, but with no trade deal and a strong dollar, they feel secure in their stance.
A key technical indicator to watch is the old-crop/new-crop spread. If nearby demand continues to emerge, July cotton should gain on December, especially if adverse spring weather delays the planting of the new crop.
For Tuesday, close-in support for May cotton is 75.25 cents and 74.75 cents. Resistance would be at about 75.98 cents and 76.14 cents. Overnight estimated volume is 2,210 contracts.