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Is the Cotton Market Showing Longer Legs?

Amore, you have to love the cotton market. Why trade double digits when triple digit daily movements are running amuck?

The stars seemed to align well for the cotton market this past week, as Wednesday and Thursday (April 29-30) had triple gains and moved to highs not seen in almost nine months – all the way back to September 2014. Friday’s sell off was not welcomed, but was little more than profit taking by the speculative community.

This week’s price advance was based on both the fundamental and technical side of the market. The market pushed the trading range a cent higher, up to 68 cents. Thus, we are on the cusp of a 70 cent old crop trade, and a new crop picture that needs only limited help to challenge that same 70 cent level.

As has been noted for several weeks, prices continue to establish higher and higher lows – the definition of an uptrend. The positive technical signals do not stop there. Most impressive is that the market has posted strong signals of a bottom. The price charts now show a definitive major “W” bottom – and not just a single bottom, but two “W” bottoms.

The market tried to form an inverted head and shoulders formation recently, but has now almost completed the entire formation, which project prices to the very low 70’s. Further, as prices have climbed, the advance has been based not only on increased volume, but also on increased open interest – another signal of further price advancement.

Fundamentals came into play as well, as Chinese prices have fallen to the point where mills’ margins have turned profitable, especially for the larger mills spinning 40’s and better. Small mills are still struggling, but some coarse count mills have reported profitable margins.

India announced it will purchase cotton from growers in an effort to support prices. While this cotton will eventually come to the market, for now, the available supply has been decreased and brought about higher Indian prices.

U.S. net export sales were a decent 124,200 RB of Upland and 10,200 RB of Pima. Another 42,900 RB of Upland were sold for the 2015-16 marketing year. This was not a bullish report, but was decent in that part of the week saw prices above 65 cents. Too, weekly shipments totaled 290,100 RB, of which 285,300 RB were Upland.

Total sales and shipments are above 11 million bales (480 lb. bales) – 200,000 more than the current USDA estimate with another three months and one week remaining in the marketing year.

Premium grades continue to be well demanded, as the basis continues to improve for 31-3-35’s and better. The drag on the market continues to be the 41-4-34’s – the only remaining U.S. carryover and also the bulk of the world’s useable carryover.

Amore, this market has longer legs.

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