Cotton prices firmed again on Wednesday as speculative investors placed fresh bets on higher prices after the fibres market broke above a short-term trendline following Tuesday's US Department of Agriculture crop report. New speculative buying pushed prices up 0.84 percent to 75.53 cents per lb, their highest level since October 23, just before closing. That extended the 2 percent rise seen a day earlier.
"It broke out of a technical formation and inspired technical-related buying. The short-term trend is bullish," said Peter Egli, the director of risk management at UK-based medium-sized merchant Plexus Cotton Ltd. Easing off earlier highs, the most-active March contract on ICE Futures US settled up 0.22 cent, or 0.30 percent, at 75.12 cents per lb.
Exchange data showed investors took on new long positions on Tuesday - with open interest, a reflection of outstanding contracts, jumping 2,000 lots, the biggest daily increase in almost two months, to 164,076 lots. This is the first meaningful increase in liquidity since it fell by almost a quarter from 208,000 lots on October 29. The latest burst of buying started midmorning on Tuesday after an initially subdued reaction to the USDA report. It was encouraging that there was follow-through buying on Wednesday, traders said. Chartists said the March contract was primed for a breakout after setting two triangle formations when prices hit peaks at 80 cents on August 31 and again on October 17 at 76.39 cents per lb.
It is unclear how long the spurt higher may last before weak supply-and-demand fundamentals return to the fore and producers sell into the rally, traders said. Based on a relative strength index reading, prices were close to being technically overbought with a reading of 64 on Wednesday, the highest in almost two months. A reading above 70 would signal overbought status.
In its monthly crop report on Tuesday, the US Department of Agriculture lowered its 2012/13 world cotton stocks forecasts for the first time since the marketing season started in August. While the report contained only minor changes to forecasts and the USDA still expects a record carryover, the headline numbers showing a slight improvement in demand and falling output were enough to trigger buying.