Wednesday, January 23, 2013
Cotton futures are beginning to draw the attention of some trend-following traders, as prices rise to highs not seen since May of last year. Many large and small speculators added to their net-long positions last week, with the most recent Commitment of Traders report showing an increase of over 3,800 contracts the week ending January 15th. Though chart resistance levels are still nearly 500 ticks higher, momentum indicators are looking overbought, and commercial hedge selling may accelerate should there be any signs that Chinese buying is beginning to slow.
After being one of the worst performing commodities of 2012, Cotton futures have started 2013 strong, as better than expected export sales and the possibility of lower Cotton acreage in the US have sent prices to 7-month highs. In 2012, China imported just over 5.1 million tons of Cotton, which was over 50% higher than 2011 totals. This sharp increase in imports occurred despite higher domestic Cotton production last year. China has now accumulated enough Cotton in its commodity reserves to meet 1-year's usage, which is keeping some traders from becoming too bullish on Cotton's price prospects, as it remains to be seen how long China will continue to buy now that prices have rallied. In addition, market talk continues to swirl that China may release some inventory to its domestic market, which if true, would put into question further significant Chinese purchases in the coming months. Current high prices for both Corn and Soybeans have put into question how many acres US producers will dedicate to Cotton production this coming season -- especially with Texas, Oklahoma and parts of Alabama and Georgia still feeling the effects of moderate to severe drought. New-crop December futures prices may need to rise further to "buy" acreage from the "food crops". Traders should keep an eye on the intra-commodity spreads in Cotton, as any signs a slowing pace of Chinese buying could see old-crop prices falling relative to new-crop months which still need to "fight" for acreage in 2013.
Technical Notes
Looking at the daily chart for March Cotton, we notice Tuesday's rally to 7-month highs nearly filled the chart gap left from the sell-off seen back on May 10th of last year. The 20-day moving average (MA) has recently crossed above the 200-day MA, which many technicians view as a bullish indicator. The 14-day RSI has moved into overbought territory, with a current reading of 75.41. Should the chart gap be filled at 80.56, we do not see any upside resistance until the 84.50 price level. Major support is seen at the recent low of 73.72 made back on January 4th.
Mike Zarembski, Senior Commodity Analyst