COTTON: May See Some Rains for the US Cotton Producing Region
July cotton closed lower on Friday after trading to a new contract high for the second straight day and the key reversal is seen as sign of a possible short-term top. The market had gotten short term overbought after the sharp rally last week, so it was not surprising to see a pullback. Prior to the selloff on Friday, the nearby contract reached its highest level since July 2011. The bulls had been encouraged by a strong export sales report on Thursday and ongoing concerns over the US crop. The US Drought Monitor on Thursday reiterated the dire conditions in west Texas and showed them worsening from the previous week.
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The 1-5-day forecast calls for rains of up to 1.5 inches in the region, which is an improvement from recent trends. However, the rains shifted a little bit East overnight which is a positive. The 6-10 forecast has normal to below normal chances of rain, and the 8-14 day has normal to above normal. Friday's Commitments of Traders showed managed money traders were net sellers of 4,239 contracts of cotton for the week ending April 26, reducing their net long to 69,273 contracts. Non-commercial & non-reportable traders were net sellers of 4,762, reducing their net long to 93,450. The long liquidation selling trend is a short-term bearish force.
MARKET IDEAS
With some decent rain in the forecast and the extreme overbought condition, the market is vulnerable to a short-term setback. The key reversal's for July and December cotton suggest a short-term peak may be in place. July cotton resistance is at 149.05, with initial key support at 136.19. December cotton resistance is at 125.11, with 115.73 as initial key support.