The technicals took a heavy toll on New York futures this week as the December contract, failing to take out the 65 cent level discussed last week, fell like a rock down to the 63.50 support level, hit sell stops and crashed down into the 61 cent territory.
With current trading below the 9, 18 and 40 day moving averages, the technical picture calls for the market to drop into the high fifties. I have been of the opinion, and still hold to that view, that the downside risk in December is 58 cents. We may be in for a test of that next week. Yet, as the year wears on December futures will likely move back to the low to mid sixties.
On the heels of the weekly sell off, USDA's August supply demand report for cotton was released before Friday morning's opening bell. The report, neutral to slightly bearish from the world perspective, was somewhat counterbalanced by a neutral to slightly bullish indication with respect to U.S estimates.
However, the overriding market reaction, as evidenced by New York's continued sell off, indicated that the market had not expected world stocks to rise above USDA's July estimate. Thus, the market, in line with bearish technicals, easily worked lower once the market opened.
The August USDA report placed world beginning stocks at 57.86 million bales, up some 540,000 bales from the July report. World production was raised and insignificant 130,000 bales to 115.92 million. However, world consumption was increased 620,000 bales up to 127.78 million bales.
Thus, world carryover increased just 54,000 bales above last month's estimate, climbing to 51.52 million. Therefore, on the surface there appeared to be little change in the report compared to last month.
However, significant changes that readily impact the perception of market movement were imbedded in USDA's estimates for China. USDA now expects China to import 16.0 million bales, down 500,000 from the July estimate. The decline in the estimate of import demand by China, if it matures, sends a bearish signal to the market.
It was, after all, the decline in 2006-07 import needs by China, compared to the early season estimates by USDA, that keep pressure on New York during the August 2006 to June 2007 time frame. Other estimates for China were little changed from the July report.
marketing@alchempro.com
