Fundamentals
Cotton traders are keeping an eye on Tropical Storm Isaac, as it is expected to become a category 2 Hurricane as it enters the Gulf of Mexico. The current anticipated path is expected to generate heavy rains in the Mississippi Delta region that could damage the maturing Cotton in the region. This fear is supporting December Cotton futures despite “bearish’ news out of China, where the country is expected to release nearly 1 million tons of Cotton from state-owned reserves. The release of reserves into the market has many traders speculating that Chinese imports will be lower than expected this year, as weak demand due to a slowing of the country’s economy should allow for a global surplus of Cotton going into 2013. Both large and small speculators are holding a net-long position in Cotton, with the most recent Commitment of Traders report showing non-commercial traders adding over 6,000 new net-long positions for the week ending August 21st. This was at the height of the recent rally in December Cotton, and prices have since slipped from 4-month highs. Should the storm damage to the Southeastern U.S. Cotton crop be minimal, we may see Cotton prices decline as weak longs begin to exit the market.
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Looking at the daily chart for December Cotton, we notice prices moving slowly higher since contract lows were made back in June. Though we are currently trading above the 20-day moving average, we will still need to see prices rally another 8 cents per pound to test the widely watched 200-day moving average. Trading volume has been relatively lackluster the past several weeks, and momentum as measured by the 14-day RSI is neutral, with a current reading of 57.10. The recent high of 77.49 made on August 21st looks to be the next resistance area for December Cotton, with near-term support seen at the August 13th low of 71.59
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