Chinese Buying Rallies Cotton Futures

Friday, November 11, 2011

The daily chart for March Cotton shows near-tem support near the 95.00 area and strong support just above the 90.00 area. Some traders who are looking for these support levels to hold may perhaps wish to explore selling a put credit spread in Cotton futures options. For example, with March Cotton trading at 99.15 as of this writing, the March Cotton 95 puts could be sold and the March Cotton 88 puts bought for a credit of 220, or $1000, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in February should the March futures be trading above 95.00.

Fundamentals

A surge in US Cotton exports last week sparked a rally in Cotton futures on Tuesday, sending the March futures near the $1 level. The Cotton market has been quiet lately, as many traders were reluctant to hold any significant position ahead of the USDA crop production and supply/demand reports which were released this past Wednesday. The reports were deemed neutral towards Cotton prices, as the USDA lowered its US Cotton production estimate only moderately to 16.3 million bales, which is down from the 16.608 million bale estimate in the October report. The decline in production was offset by a lowering of the 2011-12 export projection by 200,000 bales. US Cotton ending stocks were estimated at 3.8 million bales, up 1.2 million bales from last year. Though the market's reaction was muted after the report was released, it was a different story on Thursday, as the USDA announced that 998,000 bales of Cotton were sold last week, with China being the largest buyer. Many traders believe that this buying may have come to help restock the Chinese state reserve, and if it has, it may force the USDA to revise upward its US export projections going forward. The large Chinese purchase was the first real positive news on the demand front in quite some time and may help to stabilize prices in a market that is trading on the lower end of its yearly range for the new crop futures. With the current turmoil in Europe expecting to slow economic growth on the "continent" and Chinese economic growth "slowing", demand for commodities in general is expected to slow in 2012. However, should the recent Chinese purchase turn out not to be a "one-off" event, we could start to see signs of a near-tem bottom in Cotton going into the New Year.

Technical Notes

Looking at the daily chart for March Cotton, we notice a symmetrical triangle formation beginning, with prices trading in a narrower range since August. This pattern will eventually resolve itself with a breakout in either direction, usually on larger than average trading volume. Until that time, the market is trying to close above the 20-day moving average (MA) but remains well below the longer-term 200-day MA, which is currently near the 110.00 area. The 14-day RSI has turned neutral, with a current reading of 50.69. Support for March Cotton is seen at the 10/21 low of 95.00, with resistance seen at the recent high of 102.85 made on October 31st.

Mike Zarembski, Senior Commodity Analyst