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The rate cut news from China and a continued push by China to support domestic prices by purchasing grain and cotton to boost state reserves has been seen as a positive force. However, to expect that a significant low is in place, traders would have to assume that the worst of the demand news may have passed. This is brave assumption given the readings on consumer spending and the weak outlook for housing, employment and discretionary spending. Consider bearish strategies on the technical rally and watch for at least a test of the November lows. March cotton advanced on Friday extending the rally against a backdrop of stronger stock indexes and mixed results in commodities.
Traders said that strength in stocks for the fourth session in a row helped eased economic concerns somewhat from the near panic levels of recent weeks, and that this in turn had eased cotton traders’ concerns over longer term demand destruction. Some analysts say that pent up demand after months of retrenchment by consumers is combining with lower gas prices and the advent the Christmas shopping season to brighten the near and intermediate term outlook for apparel. Other buying was credited to short-covering ahead of the holiday. The US agricultural attaché in Egypt projects this year’s planted area there to fall by 50% with imports expected to rise 50%. Traders look for weekly export sales news this morning to show sales above last week’s impressive level of 203,100 bales. This seems to open the door for bearish news today. Open interest was at 220,037 contracts on September 15th and has fallen to 128,157 contracts as of Tuesday. The upside appears limited due to the potential for further reductions in demand for the market ahead.
TODAYS GUIDANCE: Look for a return to deflationary pressures on the economy and for weak demand news to begin to pressure cotton prices again.
