With some exceptions, cotton’s week was spent up 60, down 60, up 80, down 80 – backing and filling the entire week.
Fundamentals were highlighted by a bearish export sales report, fully expected due to the prior week’s six month highs. However, the report provided a slight bounce, in that actual shipments were very bullish.
Technically, the price support keys provided strong support, just as the price resistance keys were effective in keeping the market within its six cent range between 61 and 67 cents. The market is still attempting to flex its arms and muscles a bit to the top side. This pattern will continue.
Market activity seemed subdued all week, as traders attempted to sort out the bullishness of the prior week that followed with triple digit losses the prior Friday. Nevertheless, the week ended on a positive note, as the spot July contract closed well above 66 cents and the new crop December closed just under 66 cents. In fact, the market secured a late weekly closing charge to reach the plus category for the week.
It was just January when most were clamoring for 56 to 57 cents, and the equilibrium level was just a mere 60 cents. Now, having moved to 65 cents, the equilibrium should be expected within 250 points of 65 cents. This opens the way for a test of 68 cents, basis the July contract. With export activity as brisk as it has been, the market is well positioned to bust out of its tight range and ease slightly higher.
Open interest continues to build in the market, but one major fund continues to be exceptionally long in the futures market. There is some concern that should that long begin to exit some of its positions, the market could lose as much as 200 points. Thus, there continues to be significant risk to the downside of the market, but generally only within the trading range.
Yet, should that fund maintain its positions, then the declining U.S. acreage should be enough to hold prices within the top end of the range while it pecks to the upside in an effort to test higher prices. The market has solid support in the 65.50 cent area, with the next level being 100 points lower at 64.50. The first resistance level can be seen at 67 cents, with the next 100 points higher at 68.00 to 68.25. Above that, the objective would be 71 to 71.50 cents.
The entire Southwest received moisture this week, with the region well covered with very large amounts. Little field work was done all week, and some land may be lost to cotton in favor of sorghum. While the moisture would be good for cotton, it has become a bit late for some areas to plant cotton. Additionally, the widespread moisture offers an excellent risk alternative to cotton given the moisture level to date. Generally, the fixed cost risk for cotton would be near $500 per acre versus only about $150 for sorghum.
The Mid-South and Southeast made major strides in catching up with field work and planting. Given the upcoming weather outlook, the two regions should be back to normal.
The trading range will ring true until the June 1 weatherman gives us some indication of the June weather.