Cotton Shrinkage Sparks Rally
Fundamentals
China's Cotton crop may have suffered worse damage than previously expected, which will likely cause the nation to suffer its second consecutive decrease in output. This comes on the heels of news that Pakistan's crop is suffering similar damage. These two Asian heavyweights will likely need to import heavily to meet current demand. This bears a striking resemblance to the Wheat situations a little while back, when US farmers enjoyed favorable growing conditions while farmers elsewhere suffered damage. The Cotton market has rallied very sharply over recent weeks due to the smaller, lower quality crops being produced elsewhere. The question now becomes whether the market is overdone or if it can sustain the recent rally. Certainly, further gains over the short-term are possible, but a more sustained rally could result in textile manufacturers looking for other alternatives. The relatively low price of petroleum may make synthetic fabrics more attractive.
Trading Ideas
The Cotton market is riding the wave of extremely bullish news currently, but many traders may become uneasy at the scope and swiftness of the rally. As we have seen with other markets such as Wheat, prices can quickly outpace fundamentals. The chart shows no sign of letup at the moment, but that can easily change due to the extreme nature of the move. Some traders may wish to hold-off for the moment before taking action and wait to see if the market will give an indication whether it will correct or consolidate.
Technicals
Turning to the chart, we see the December Cotton contract making a sharp and parabolic run-up in prices. The steep move may be cause for concern for traders in long positions, as markets can sometimes correct very sharply after making such a move. Some traders may want to pay attention and attempt to spot any sort of reversal pattern or consolidation pattern forming to give a clue as to how the market may behave. The RSI is giving overbought readings, which may be a moot point given the news-driven buying at the moment.
Rob Kurzatkowski. Trading Specialist
