Is the bullish enthusiasm for Cotton "boiling" over?
Fundamentals
Deflationary fears are not in the minds of Cotton bulls, as prices climbed to 12-week highs on Tuesday. The most important factor driving speculators back into the Cotton market is the concern that U.S. acreage dedicated to Cotton production will once again be cut, as producers switch to planting Soybeans this spring. If true, then it appears that both U.S. and world Cotton ending-stocks will fall, as Chinese acreage is expected to decline as well. Speaking of China, it looks like China has been in the market for Cotton, as U.S. exports have increased during the past couple of weeks. Traders have noted that certified Cotton stocks eligible for delivery against futures have fallen sharply, with expectations that most of this supply is headed for China. As prices begin to recover, additional speculative interest has been coming in on the long side of the market, with the most recent Commitment of Traders report showing that combined large and small speculators are holding a combined net-long 14,409 contracts as of January 20th. However, producer hedge selling, which has been light of late, may start to appear given the recent rally. In fact, the sell-off that occurred after yesterday's highs may be a sign that commercials may want to begin to lock-in prices on this upswing.
Technicals
Looking at the daily chart for March Cotton, we notice a few signs that the recent rally might be getting a bit tired. First, notice how the 100-day moving average seemed to stop the rally in its tracks. Trading volume was very light yesterday, which may be a signal that no fresh buying was found, despite the fact that volume moved to 12-week highs earlier in the session. The 14-day RSI also failed to make a new high yesterday, signaling a possible shift in momentum. 52.40 is now the next resistance point for March Cotton, with support found at 46.90.
Mike Zarembski, Senior Commodity Analyst
