After rallying nearly 1200 points since the first of April, cotton prices corrected quite sharply in the last half of the week. From a technical point of view, the rally had been almost a perfect 50% correction of the collapse from the March highs to the low on April 1st.
In any event, after a light volume, extremely sharp - short covering rally Wednesday morning the air got rather thin as once again, prices had run off and left demand below.
Wednesday’s reversal off the extreme highs constituted an "outside day reversal". This is considered a very reliable signal and in this case, a sell signal - and sell they did as prices continued lower for the balance of the week. Trade buying was evident at lower levels Friday.
For the week, the May contract which goes into delivery Wednesday night, lost 328 points, July 309 points, and Dec 220 points.
What will make this upcoming delivery period potentially THE most interesting in a long while, is that not only are cert stocks at record highs but the market differences are actually reflecting considerably more than carrying charges. That too is a historical first as far as I know. This could make for a temping situation for a big fund that might have the nearly 400 million dollars it would take to take delivery of that much cotton.
Cotlook reduced their estimate of world production for the 2008/09 season by 1.6 million bales. That included a 482,000 bale reduction in China and 353,000 bales reduction in the US. Other significant cuts were predicted in Turkey and Brazil. Reductions in part reflected switching of cotton to food crops.
Bottom line, even after considering an economic slowdown, Cotlook reduced their estimate of the world carryover by 1.575 million bales. Others have estimated that China's cotton plantings in some areas will only be about 85 percent of a year ago. However, increased production on a year to year basis is expected in India and Pakistan.
A very decent three-cent shelf of fundamental support in the form of both fixations and fresh export off take is believed to exist beginning around Fridays lows. (May 70-67 and July 74-71).
However, from a technical standpoint, the spiked-blow off reversals so ominously evident on the monthly, weekly and daily charts should clearly keep prices on the defensive this week. July narrowly escaped an outside range reversal on the weekly charts. Bears will gain additional momentum if May closes below 7021, July 7367 and Dec 8144.
As mentioned last week, seasonal patterns also fail to support the bull argument at least for the next couple of weeks. In fact the July cotton has declined 13 of the last 15 years in the three week period between the middle of April to the end of the first week of May.
All that being said, the funds are still basically bullish and with signs of bottoming action, will be right back in on the long side. Bears and mills without coverage should not become too complacent
December's chart shows independent technical support but even there the market has a heavy look. However, there is a seasonal tendency for the next two months for December to gain on the July contract. One has to be impressed with managed money speculators committing significant funds to Dec $1.50 calls last week.
