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Traders are trying to figure out just how far the cotton market could correct after the relentless rally of the past 10 weeks. This is not easy as there was not a specific reason for the aggressive fund buying in cotton on the way up except that cotton appeared undervalued “if” the economy was to stabilize. Traders see cotton consumption increasing once there is a growing world economy. Part of the reason for the strength in cotton prices in China was that government officials were buying up domestically produced cotton from producers to build a strategic reserve during a period of weak textile exports. Part of the reason for the reserve which is thought to have reached near 12.5 million bales was to help support prices so that China cotton production would not suffer much of a decline this season. Traders are now concerned that China may eventually release part or all of the reserve. The market saw follow-through selling from Tuesday’s reversal-type action which helped confirm a near-term top in the market. A sharp slide in the stock market and concerns that China may soon allow mills to draw from their reserve helped to pressure the market. Ideas that futures are technically overbought and fears that the export pace could slow after the recent surge higher in futures added to the negative tone. For the weekly export sales report traders look for sales near 115,000 bales from 142,900 bales last week. The USDA believes world cotton consumption will reach 113.54 million bales for the 2009/10 season as compared with production at 106.46 million bales. Lower production is coming from the US and China. China production is expected to slip 8% to 33 million with usage at 47.5 million. US ending stocks were pegged at 5.6 million bales from 6.8 million this year and 10.04 million last year. Production is expected near 13.25 million bales with exports of 11 million. World ending stocks are pegged at 57.8 million bales from 62.3 million this season.

TODAY’S GUIDANCE: The extreme overbought condition of the market and uncertainty on “if” and “when” China might begin to release reserves leaves the short-term fundamentals uncertain. December cotton short-term resistance moves down to 62.10 with 59.55 and 58.20 as first good support levels. Close in resistance comes in at 60.90.

This content originated from – The Hightower Report.