We did not see a 10c rally in 2 weeks, and admit fully that we did not anticipate a 10c drop in 2 days. After spending 7 months in an 82c to 89c band, this market has gone nuts in mid August. This action is very similar to those years with hurricanes in Aug and Sep, and perhaps a few years from now, young traders will look at this chart action and wonder what hurricane drove this market 10c, then collapsed by the same. This hurricane is about tiny cert stocks, a dearth of early harvest, and plenty of time before harvest in which to behave wildly.
The setup now is that the spec and fund elements remain very long, and a 2 day break won’t bust them out. They have been big long for 6 months, and rode the market through the entire sideways period, and are likely still sitting on the bull after today’s dust settles. How this crowd views action this week will determine the next move.
On more mundane issues, and certainly one that traders could care less about, we continue to think the Texas crop has been cut too sharply. After getting abandonment in line with the USDA, we find that some districts are carrying dryland yields at 300 # and under. Rains of July and Aug have been pretty good. Our belief is that Texas is ¼ to ½ Mb better.
Varner View
How to proceed from here is unknown to us, except we do stand behind our call yesterday that the high for the year is in. Funny how we have gotten only a few betters to take the bull side. A po-boy and a heinnie in the Delta seems to be a scary thing when it comes to forecasting cotton. So if the high is in place, we want to once again view rallies as selling opportunities. But against action of the last 2 weeks, we’re not sure what a rally would look like. Specs can try to sell the gap at 8865, but after about 10 this morning, this price now seems excessively high. Farmers must focus only on the Dec, as long as these inverts remain, and SELL, SELL, SELL. Carrying cotton through an invert like this makes no sense. Carrying cotton to the Mar and then selling will cost a grower $20/b. Don’t do it.
Technicals
Chart is spot month continuous, and shows an intact sideways range from late Jan forward, from 79c to 94c. The high of 18 Oct 2012 at 7919 coincides with the low in the period range of 7930 made on 31 May 2013. This is a long way from current price, but its clear that 7930 is a defining and critical level of support. The spot chart shows a rising trend line off the Nov low then the June low crossing at 8365. Spot Oct got within 25 ticks of that level today. A seasonal low is due in mid Aug, usually around 11-15 Aug. Thus a low may form this week that may be the seasonal, by which cotton can muster a rally of some sorts. Sell it.
