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Closing lower after a dose of bullish news from the USDA on Thursday leaves the market vulnerable to at least a significant downside correction over the near-term. Even if the outside market forces remain positive, the market seems vulnerable to a correction from the short-term overbought condition as focus shifts to the new crop condition and the outlook for demand. July cotton initially made an upward extension on Thursday finding early support from outside market influences and a bullish supply/demand report. The market held gains for most of the session before late day pre-holiday weekend profit taking dragged cotton lower during the last hour of trade. The reversal and lower close is a bearish technical signal; especially when a reversal occurs in conjunction with key fundamental news. The market received an initial lift from a more positive macroeconomic view tied to solid gains in global equity markets. Early bullish sentiment was further supported by revisions in the US cotton crop production and ending stocks and an upward revision on US exports which seemed to more than offset an upward revision in world cotton ending stocks. Another strong reading in weekly cotton export sales also inspired buying and the data helps explain why the USDA raised exports to 12.5 million bales from 12.00 previous. This helped push ending stocks down to 6.7 million bales from 7.3 million as the March estimate and from 10.04 million last year. Net weekly export sales for cotton, came in at 253,500 running bales for the current marketing year and 133,500 for the next marketing year for a total of 387,000. As of April 2, cumulative cotton sales stand at 98.1% of the USDA forecast for 2008/2009 (current) marketing year versus a 5 year average of 87.6%. Sales of 13,000 running bales are needed each week to reach the USDA forecast. The Commitment-of-Traders report on Friday was seen as bullish as trend-following funds shifted from a net short to a net long position buying a net 6,031 contracts in just one week. Index funds increased their net long position by 2,096 contracts for the week ending April 7th. The buying trend from both groups is a potential bullish force. There were some scattered rains over the weekend in Texas and more possibilities for moisture later this week.
TODAY’S GUIDANCE: The market is in a steep uptrend channel but also quite overbought basis traditional technical indicators. July cotton short-term selling resistance for aggressive traders comes in at 49.33 with 47.05 and 46.15 as key support.
