I wonder if my abilities to call the cotton market are on the verge of shattering (unless you feel those abilities have long been shattered).
First, I believed the 81-to-82 cent floor would hold, but did mention the possibility of the high 70s. Last week, I said the 78-cent floor would hold, but mentioned 75 cents as a possibility. The market fell through 78 cents at the weekly close and still seems to want to move lower.
I suppose I need another limb to crawl out on, so this week’s pronouncement is that the 75-to-77 cent floor will hold. I said it, and I mean it with the same full confidence that the 81-to-82 cent floor would hold.
The tailspin in which the market finds itself can only be attributed to fundamentals, or can it? Fundamentals rule the long run, but technicals do have the authority to call audibles from time to time. This is one of those times.
The world is awash with cotton. But, the cotton that is both available in the marketplace and in demand by the textile mill is limited. This is evident in cash prices, as the drop in futures prices is more severe than the decline in the cash market. For now, the 10-cent drop in prices has ended. It is past time for the market to take a deep breath, begin its climb back to 78 cents, scale the 80-cent level, and then attempt to push above the former 81-to-82 cent support level.
Once the market broke its 81-to-82 cent support, funds began to exit the market in mass, selling fifty percent or more of their long positions. This opened the flood gates. At the same time, the market was without USDA reports to confirm the beefy export numbers that were being put up by the mills. That uncertainty led to more price pressure from the bears. Bulls became even more defensive and exited yet more positions.
The selling has been going on for slightly more than two full weeks and has led the market to be historically oversold. Everyone is betting on lower prices, so it is time to pull your oars in the opposite direction.
There can be no question that the government shutdown had a heavy hand in the market’s move lower. For example, USDA is just now catching up with its export reports, releasing three weeks of data indicating that export sales (all cotton) totaled almost 700,000 bales. Had those reports been released as scheduled, the market would most likely have responded with a somewhat bullish attitude. Yet, that great unknown fundamental – government action – worked to the disadvantage of the cotton market and added fuel to the lower price fire.
Export demand for U.S. cotton is extremely strong, and, in the coming months, USDA will increase its export estimate. Chinese mills have been significant buyers over the past month and continue to remain in the market every day. Look for the March 2014 contract to challenge the 82-cent level.
Let me be sure to point out – the government did not cause me to miss the market. I caused me to miss the market. To paraphrase Pogo, I have met the enemy, and he is me.