Quick Climb and Quicker Loss
August 26, 2013 As quickly as cotton prices climbed to a 14-month high, the entire rally was lost even quicker. What took a bit more than a week to build crashed back to earth in just two days – a demise as quick and fatal as the sun melting the wings of the legendary Icarus.
The rally was promoted by three factors – deteriorating crop conditions around the globe, a record high long position initiated by fund longs, and technicals screaming for higher prices with the breakout from a symmetrical triangle formation. The breakout was a strong seven cent-plus rally, but the collapse was just as big and even far quicker. The action once again demonstrated how the market gives second chances.
The market collapse began Sunday evening (August 18) when it became evident that prices had pushed far past demand and that speculative buying had played out. Speculative buying was reduced to nil as merchants, neither able to buy physical cotton nor able to get grower fixations, were left without any selling power. With no selling, buyers were left to fall on the sword, and that they did. Thus, selling became nonexistent and put an end to the speculative longs feast. With no selling and with longs holding only paper without any rights to cotton, the market was overripe for a collapse.
It was also evident that the rapid price advance had left most demand behind. Chinese mills reported a total absence from the market, noting that – at the new price activity – the high priced local cotton was cheaper than futures. Yet even at that, weekly export sales were actually surprising, as some 81,000 RBs of Upland and 10,800 RB of Pima were sold during the 91-to-93 cent period. This week’s lower price activity has brought about more mill demand, including Chinese mills.
Just as the market gave cotton growers a second chance, it is now offering mills a second chance. While a trip down to 79-to-81 cents remains possible, the long term support near 82 cents continues to hold firm. Mills will likely begin buying in volume on any trade below 84 cents. However, there may be enough picking and scratching in the 84-cent area to prevent a drop below that level. Yet, do not discount another test of the 81-to-82 cent level.
Cotton prices have returned to their long term trading range of 81-to-89 cents and will likely remain there for some time. The December 2014 contract has also slipped down just a shade to about 77 cents. However, we still need to closely monitor the events of Mother Nature. With an estimated 50 percent of the Texas High Plains planting abandoned, weather conditions in other regions and countries must be closely monitored.
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