The Hightower Report

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A general idea that the crisis in Japan has reached a peak and that its impact on the world economy will not be as bad as feared helped to support commodity markets overnight, and cotton was no exception. China futures were down 0.6% overnight, but traders apparently saw the recent break as too far, too fast, as US market saw a bounce overnight. May cotton closed down the 7 cent limit for the second session in a row yesterday, although it was able to trade above that level for several hours during the day. Cotton was among the many commodity markets that came under broad-based pressure from the Japanese nuclear problems after last week’s earthquake. Extensive weakness in global equity markets and the general market consensus that China will continue their tightening measures added to the recent negative tone. With yesterday’s decline, cotton prices reached their lowest levels since February 28th. The May contract had fallen as much as 14% in just 8 trading sessions before it recovering overnight and trading sharply higher on the session. China’s planted area for the coming season is expected to increase by 5.4% according to the ministry of Agriculture. Ideas that the cost of the Japanese clean-up efforts could slow the global economy helped pressure the market in recent days. ICE certified deliverable exchange stocks totaled 208,282 bales, up from 204,512 bales the previous session.

TODAY’S GUIDANCE: The market could see a strong recovery off of the recent 8-session decline from the highs but it still looks as though a significant top could be in place.

TODAY’S MARKET IDEAS: May cotton resistance comes in at 200.64 and 204.28 with 184.23 as next support level. December cotton resistance comes in at 124.38 with 115.55 and 109.30 as downside targets.

Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

The market continues to be propelled higher by a sharp rise in prices in China, continued demand for US exports and tightening deliverable supply. Traders believe that much of the US cotton is already accounted for and that there is little free supply on hand. In other words, producers have already sold out of much of their supply, and exports have commitments ahead. With ending stocks already pegged at the lowest level since our records begin in 1960, a revision higher in exports and lower in ending stocks due to the strong export pace may tighten the situation further into the spring. On top of the tight supply, traders are concerned about drought conditions developing in the southwestern plains. March cotton closed limit up the expanded 5 cent range on the session yesterday, and the rally pushed the market to new all-time highs for nearby futures. Continued strong gains for China futures markets for the second session in a row helped to drive the market limit up, and even the December new crop futures posted a limit up advance to close at 113.74, up from 99.01 just six sessions ago. The Cotlook A index is at 185.70, up 4.00 from last week and compared with the March futures close at 161.94. This leaves US futures at a significant discount and is one of the reasons that the US export pace remains so strong despite the highest cash market in at least 140 years.

TODAY’S GUIDANCE: The market saw negative outside market forces overnight to pressure futures. Unless there is a significant problem developing with world demand, the old crop fundamentals are likely to stay strong. The resumption of the uptrend for March cotton this week leaves 167.35 as next upside target, with support back at 155.20 and 152.55.

Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

With a positive tilt to the USDA reports, the market managed to close higher on the session yesterday but down from the levels it had reached in after the report release. This might be a concern for the bulls, as moving lower on supportive news is seen as a negative technical development. Outside market forces have been positive, which has added to the bullish tone in the market recently, but if outside markets turn sour for a day or two, there could be a lack of new support under the market. March cotton closed slightly higher on the session yesterday but down 428 from the early peak as the market found little in the way of new buying interest even after a positive USDA supply/demand update. Traders remain concerned that index fund rebalancing could pressure the market this week, but futures closed higher for three sessions in a row. For the report, US ending stocks were left unchanged at the extremely tight level of 1.9 million bales, while world ending stocks were adjusted lower to 42.84 million bales from 43.39 million last month. China’s numbers were left unchanged, and Brazil’s production was revised slightly higher. However, India’s usage was revised higher by 500,000 bales, which was seen as a positive factor given the extremely high price level. Traders see a significant jump in planted area for the coming year in the northern hemisphere, and a larger crop will be badly needed to restore tight supplies. December cotton closed lower yesterday after posting a new contract high. Traders will continue to be on the lookout for any sign that high prices are crimping demand. For the weekly export sales report, released before the opening, traders see sales near 150,000 bales.

TODAY’S GUIDANCE: March cotton posted a high of 152.25 just after the USDA data yesterday so while the market closed higher on the session, the close at 147.97 does not give the bulls much confidence. Outside market forces look a bit negative today, and given the lack of resting orders in cotton, a small amount of selling could be difficult to absorb. Selling resistance for March cotton comes in at 150.88, and a close under 145.79 could sour the charts and spark a more significant setback. The reversal for December leaves 101.10 as first good support.

Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

It may be difficult for the market to hold off more aggressive long liquidation selling if outside market forces stay weak. A report from the International Cotton Advisory Committee highlights the tightness in the market. Of the 8.3 million tonnes of world cotton trade, the group believes that only about 10% is still available for purchase. And it is still early in the marketing year. The fundamental outlook for a tightening supply persists, and traders project the January supply/demand report to show even tighter supplies ahead. The USDA could lower its US ending stocks forecast due to the strong export pace, and world supply could also tighten if the USDA lowers its crop forecast for China. In December, Chinese officials projected a 2010-11 cotton crop of 28.5 million bales, which was down from the USDA’s forecast of 30 million. Producers and trade representatives are meeting at the annual Beltwide Cotton Conferences in Atlanta, and there could be producer survey from that event which will give traders a better sense of the increase in plantings that can be expected for the coming year. March cotton closed higher on the session yesterday and bucked the trend of most other commodities. The market began to sell off with other commodity markets when the gold and energy markets collapsed, but a lack of new selling interest and ideas that next week’s USDA reports will again be supportive to the market helped to ease selling pressures. Certified cotton stocks deliverable to the exchange increased slightly to 113,604 bales.

TODAY’S GUIDANCE: Negative outside market forces should continue to weigh on the market short-term. The market still looks poised for a more extensive corrective break. The island top formation and the lack of short-term support could keep the trend down for now, as long as outside market forces are not too strong. Resistance for March cotton comes in at 144.15 and 145.80 with 135.40 and 129.80 as key support levels.

Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

The turn down in the US dollar and the already very strong export sales pace are positive forces for the market to absorb, and traders also see the need for prices to remain relatively high in order to attract 1.5-2.0 million acres for the coming season. On the other hand, fund traders and investors are shying away from cotton, according to the COT reports, and open interest has not changed much despite the 43% price gain off of the November 24th lows. In fact, the net long position of the index funds is near the low end of the 5-year history of the reports on those traders. March cotton pushed sharply lower on the session yesterday and traded down as much as the 600 point limit before a recovery bounce. The market closed near the middle of the day’s range but down 236 points on the session. News that China increased interest rates by 0.25% was seen as a bearish force for most commodity markets, but most of those markets also saw a decent recovery, as the trade saw the move as not as severe as expected. Many traders also believe that while the rate hike might slow the China economy somewhat, it will have a limited impact on the consumption pace. Even the US stock market moved from sharply lower Sunday night to trade higher into the mid-session yesterday, and other key commodity markets also saw a limited reaction to the China rate hike news. Stocks registered for delivery against ICE contracts fell to 113,486 bales from the previous total of 125,134 bales. There were 0 bales pending review. The Commitments of Traders reports as of December 21st showed non-commercial traders were net long 51,769, up just 85 contracts for the week. This is important because December 21st was the all-time high, and one would have expected funds to be buying into the highs, but this was just not the case. In fact, open interest has not changed much since the break off of the November peak. Commodity index traders held a net long position of just 58,632 contracts, which was down 1,986 for the week. These traders were net long more than 80,000 contracts in late 2009 and long 122,555 contracts back in February 2008. In other words, funds are shying away from cotton despite the extreme uptrend. Cumulative cotton export sales stand at 90.9% of the USDA forecast for the 2010/11 (current) marketing year versus a 5 year average of 55.1%. This leaves the door open for the USDA to raise exports and lower ending stocks in future supply/demand reports. In Brazil, cotton plantings are thought to be up about 44% this year to 1.2 million hectares with a production estimate around 1.84 million tonnes, up 55% from last year. Argentina plantings are thought to be up 25% to 600,000 hectares with production expected to be up 43% to more than 330,000 tonnes.

TODAY’S GUIDANCE: The fundamental setup remains supportive for old crop, but new crop will be in question if the world expands cotton plantings next year. The technical action remains negative, and the island top on December 21st is looking more and more like a major high. Support for March cotton comes in at 140.80 and 135.12 with 148.70 as resistance.

Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

The March contract surged overnight to its highest level since the market’s peak day on November 10th. The overnight gains follow a limit up close yesterday. Weakness in the dollar and strength in other commodities was thought to be a contributing factor yesterday, but outside markets were more mixed overnight and this did not slow the sharp rise in cotton. The market’s attention is now focused on the fact that 2010/11 US ending stocks, at 1.9 million bales, are now projected at their lowest point since at least 1960, and this comes at a time of increased world demand. This low stocks projection comes despite the fact that the USDA has failed to adequately address the impact that the rapid pace of exports is likely to have on this ending stocks. US export sales are currently running at 87.5% of the USDA’s projection for the entire marketing year, far above the average pace of 51.8% seen at this point in the marketing year over the previous 5 seasons. Yet the USDA left exports unchanged on its December and October reports and they only raised their projection by 250,000 bales in November. With domestic usage creeping higher on the December report as the US economy slowly improves, the USDA is apparently assuming that the cotton market will continue to rally and that this will bring a sharp drop in the pace of export sales in coming months. The market’s other focus will increasingly be on next year’s planted acreage. Corn, soybeans, sorghum and even wheat are competing for acreage with cotton, and current price levels may not yet guarantee the 1 1/2 to 2 million additional acres (or more) that cotton appears to need to both keep up with world demand and to replenish stocks. A government official in India reports that cotton arrivals at spot markets are up 2.3% for the 2010/11 year to-date. They credit this to dry weather which allowed farmers to accelerate the pace of harvesting. Wet weather caused arrivals to drop in October and November, but a resumption of dry weather since then has again boosted arrivals. Stocks registered for delivery against ICE contracts rose to 114,876 bales yesterday from the previous total of 110,058 bales.

TODAY’S GUIDANCE: The March contract has nearly reached our latest objective at 150.00 which is just below the November high at 151.95. While there is a chance that the market will simply launch into a major new round of highs, a more likely scenario may involve some sort of consolidation near the current highs. This could involve a temporary push into new highs. Longer term, the trend look to remain up. First support is now near 132.34 to 134.25 with next support at 129.67 to 130.43.

Below is a sample of The Hightower Report’s Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

The market rallied above its 4-day consolidation period overnight, boosted in large part by India’s announcement that recent rains may cut its exports for 2010/11 to 2.5 to 2.6 million bales. This is less than half the 5.5 million bales currently allowed by the government for the marketing year. This supports the idea that the 4-day consolidation was a base that can support the cotton market’s first serious recovery bounce since the downturn began during the first half of November. A 50% retracement of the November break would take the March contract back to 131.54. The overnight bounce came despite another new 2-month high in the dollar. The latest, and last, Crop Progress report of the season from the USDA shows the US cotton harvest at 91% complete as of Sunday. This compares to 86% last week and 80% at this point last year. Harvest is lagging in Arizona which is at just 63% complete versus a 5-year average of 75%. The remainder of the unharvested cotton crop is in Texas, Oklahoma and Kansas, although the harvest pace there is running well above the 5-year average. Weather forecasts remain dry in the southern Plains through the end of the week. The Commitments of Traders report for the week ending November 23rd showed mixed activity by funds. Trend-following (managed) funds were net sellers of 2,182 contracts, which reduced their net long position to 38,752 contracts. This is just the 6th largest net long position held by these managed funds among all of the agricultural markets covered by the COT report. Given the extreme level of tightness projected for cotton into the end of 2010/11, this would seem to leave further room for net buying by these funds. Index funds were net buyers of 2,052 contracts. Today’s deliveries against the December contract totaled 80 contracts versus 19 contracts yesterday. Stocks registered for delivery against the ICE contract rose again yesterday to 82,947 bales from the previous total of 80,339 bales. There were 17,161 bales pending review.

TODAY’S GUIDANCE: The minor trend may have turned up following an exhaustion of selling by trend-following funds and a further tightening of the world supply and demand outlook for the remainder of 2010/11. This follows India’s announcement that this year’s cotton exports could be less than half the level previously expected. A strong dollar and economic worries in Europe could slow the retracement rally, but the supply and demand outlook is likely to keep sellers on the sidelines and give a further boost to the US export sales into 2011. First resistance in the March contract remains near 123.15 to 124.15. A 50% correction of the November break would take the March contract back to 131.54. First support is above 111.13.