NEW YORK, Oct 26: NY cotton futures closed with sharp gains on Friday after punching definitively through key resistance on heavy fund buying, but traders said the rapid rise in an environment with more bearish than bullish factors leaves prices vulnerable to an equally severe setback.
December cotton futures blasted through the upside of a clearly developing downard channel on Friday, which triggered a chain reaction of stop-loss buy orders that sent prices to near two-month highs. The buying launched cotton onto such a narrow trajectory that some chartists said they feared prices may have gone too far, too fast.
Sharon Johnson of Frank Schneider and Co. Inc. noted that the last two times the Dec contract traded up to the 46.00 cents a lb area, it was followed by a quick and decisive sell-off of several hundred points. She added she saw “no reason for the market to trade differently this time around.
Based on data out Thursday and Friday morning suggesting continued weakness with demand, less damaging weather over the next several days, and the nearly unchanged beginning stocks for this crop year, futures should weaken, said Johnson.
December cotton finished 0.74 cent higher at 46.63 cents a lb, after trading between 45.90-47.0 cents. March cotton jumped 0.44 cent to end at 48.61 cents. Back months settled from 0.17 to 0.39 cent higher.
But, traders also noted that the rally occurred on very heavy funds buying throughout the session. They said funds have adding new long positions for several session, and there may be more players who may still want to jump on the band wagon.
Friday’s final N.Y. cotton No. 2 volume was estimated at a whopping 19,705 lots, after a hefty tally of 12,790 on Thursday. October 24 open interest fell by 1,254 to 70,775.
After Friday’s market close, the CFTC reported in its Commitment of Traders report that funds evened out their positions to stand 363 lots net short by the week ended October 22. Speculators ended the same week net long by 3,659 lots.
Meanwhile, traders said trade have been sellers all the way up and mills are not buying either, indicating they are waiting for cotton to fall again before jumping back in the market.
One huge question mark hanging over cotton is how much damage was inflicted on crop by a series of storms and rain.
Forecasts vary daily about how much rain will continue to drench the cotton crop. Heavy rains can undermine the integrity of the cotton fiber. And reports vary about how much yield and quality have been stricken by the the bad weather.
Alan Feild of iamhedged.com in Memphis, Tenn. said he has talked with several growers in the heart of the Delta who say their yield is what they had expected all along even if quality may be somewhat lower because of the rains.
Feild also noted that USDA had initially projected such hefty cotton crops and had over estimated export and consumption figures, that even a soggy assessment of the standing crop would still mean over supply.
On Friday, US Census Bureau issued monthly figures that show consumption well below projected annualized supply.
If December cotton should fall from its parapet, key support levels would lie around prior resistence levels of 45.15 cents a lb, 46.45, and 46.10.
Weather Services Corp. said Friday that frequent rains, and cool temperatures during drier days, have resulted in poor drying conditions and slow harvesting. It said wet weather may have hurt crop quality in both Southeast and Delta crops.—Reuters