There seemed to be very little substantive news concerning cotton Friday. Still, mid-week news and developments had seemingly set the stage for further short-term losses. Two events Wednesday and Thursday were especially important to the outlook. First, in its the monthly WASDE report the USDA forecast ending-2012/13 cotton stockpiles outside China could decline from previous figures (although strong Chinese buying is expected to boost the global total). Such ideas were confirmed Thursday morning, with Chinese sources confirmed that government officials will continue their policy of buying cotton aggressively (in order to support domestic farm prices) and building huge stockpiles in the process.
However, those events apparently did little to boost ICE futures. Indeed, after rising moderately Wednesday, the nearby May cotton contract gave back the increase Thursday and accelerated downward Friday morning. The late-week decline seemed particularly telling, since it might easily have been construed as the start of fresh downward leg on its chart. See the chart below as a reference.
The morning drop seemingly reflected trader concerns about the outlook, especially with equity indexes under pressure and prices in the energy and metal complexes plunging. Nevertheless, as the chart shows, the white fiber market posted a major comeback to end the week.
Bulls may have been inspired by strength spilling over from the grain and soybean complexes. On the other hand, they may simply have been unwilling to throw in the towel on the bull market in place since last autumn. Whatever the cause of the reversal, it was very impressive. Thus, the apparent repudiation of the drop below 84.00 cents/pound might be construed as setting the stage for a major reversal. Conversely, May cotton clearly faces significant technical resistance around its short-term moving averages at slightly higher levels, as well as from a trendline drawn across its recent highs. Whether it will prove unable to sustain such a move is very much open to question.