Cotton's three-day rally came to an abrupt end on Thursday as recent speculative and trade buying dried up and some investors locked in profits after prices touched fresh multi-month highs. After initially extending the previous three sessions' gains, cotton dropped over 2 percent in late morning trade as buying evaporated when prices touched 77.1 cents per lb, its loftiest level since Sept. 19.
"This is no more than an exhaustion. You have the exhaustion when the buyers get exhausted in the same spot, but it has held technical levels," said Lou Barbera, cotton dealer at ICAP Cotton in New York. Even after Thursday's aggressive pullback, the market's upward trend is still in tact after holding above the 14-day moving average at 75.43 cents, which also marked a 38-percent retracement from the Dec. 5 low, traders said.
"We do have room to go down to 74.4 cents, but even then, the market still looks very good. We're still seeing the right technical buying down there," said Barbera. Trading in a 1.68-cent range - its widest in five weeks - the most-active March cotton contract on ICE Futures US settled down 1.05 cents, or 1.4 percent, at 76.01 cents per lb.
Volume picked up as investors eased back into routine after the Christmas holiday break, with over 11,500 lots of March changing hands on the day. Speculative investors have been covering their shorts as well as adding fresh longs while merchants have also bought on the dips. That propelled prices above 77 cents for the first time since Sept. 19 and through a long-term resistance for the first time in 18 months on Wednesday. A 3,378-lot rise in open interest - the biggest one-day jump in outstanding contracts in over two months - revealed the extent to which new positions were placed. Open interest, an indication of liquidity, totalled 169,477 contracts.
Some investors have bet on higher prices because they expect US farmers to plant much less cotton next spring in favour of higher-priced grains. Buying ahead of index rebalancing due in early January has also been cited as a factor behind recent gains. There has been little change in the overall bearish outlook for the global market, which is facing a record surplus by July 2013.
In the immediate term, traders were braced for weekly export sales data due on Friday, hoping for encouraging numbers. China, the world's largest textile market, has accounted for about half of the weekly sales over the past six weeks. Outside of fibres, financial and commodity markets were roiled by growing worries that last minute negotiations over the US budget may be futile. Senate Majority Leader Harry Reid warned that the United States looks to be headed over the "fiscal cliff" of tax hikes and spending cuts that will start on Jan. 1 if squabbling politicians do not reach a deal. Investors fear demand for grains and oil will erode if the world's biggest economy tips back into recession.
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