While a bit oversold, the cotton market looks vulnerable to additional downside pressures just ahead. Supply fundamentals already look burdensome for cotton but if the outside market forces were to turn slightly negative, speculative long liquidation selling could accelerate. The last COT report (as of February 14th) showed that fund traders (non-commercial) were net long 17,425 contracts, a decrease of 9,133 contracts for the week and the long liquidation selling trend is seen as a short-term negative force. The market pushed sharply lower on the session yesterday as weak economic news from China and Europe helped to spark increased selling pressures to drive the market down to the lowest level since December 29th. The move under the February 10th lows added to the negative tone as stop-loss orders were filled to increase the selling pressure. There was just not enough commercial support on the early set-back. Keep in mind; world ending stocks represented 41% of the global usage just two years ago and for the 2011/12 season, world ending stocks are expected to reach 60.77 million bales or 55.4% of global usage. In addition, US ending stocks are likely to increase for the coming year if yield is anything close to normal. Certified cotton stocks deliverable against the New York contract jumped to 127,247 bales, up from 126,865 bales the previous session and up from 45,700 bales near the end of January.
The Outlook Forum is likely to show increasing US ending stocks for their first look at the new crop season in their presentations over the next two sessions. Without help from outside market forces, cotton looks set for further losses. Our attempts to sell call premium in the last three sessions has been unsuccessful and the inability to fill these orders even on rallies in the futures market could be seen as negative.
COTTON (MAY): The major trend has turned down with the cross over back below the 60-day moving average. Momentum studies are still bearish but are now at oversold levels and will tend to support reversal action if it occurs. The close below the 9-day moving average is a negative short-term indicator for trend. The defensive setup, with the close under the 2nd swing support, could cause some early weakness. The next downside target is 88.24. The market is approaching oversold levels on an RSI reading under 30. The next area
of resistance is around 92.03 and 94.24, while 1st support hits today at 89.03 and below there at 88.24.
StockMarketNews Research Team