* Biggest 2-day rally in a month seen on speculator buying
* Buying picks up as prices hit key technical levels -trade
* Exchange stocks fall steeply to three-month low
NEW YORK, July 19 (Reuters) - ICE cotton rose on Friday as investor buying lifted fiber to its biggest two-day rally since mid-June and also to a weekly gain despite losses earlier in the week.
The most-active December cotton contract on ICE Futures U.S. closed up 1.33 cent, or 1.6 percent, to settle at 86.18 cents per lb, after hitting a one-week high of 86.39 cents.
Prices were up 2.5 percent in the past two sessions.
Follow-through speculator buying from the previous session gained momentum as the December contract climbed above the 50- and 100-day moving averages on Friday, even as the price rally slowed the limited mill business seen during the previous session, dealers said.
"There's no big business that's being done. The people who are long here are the funds," said Jobe Moss, a broker at MCM Inc in Lubbock, Texas.
Speculators' bullish bet in cotton futures and options remains at high levels, though the noncommercial dealers have reduced it from a five-year high reached in March, according to weekly U.S. government data.
December prices were underpinned by expectations that supplies in the new crop year that begins on Aug. 1 in the United States, the world's largest exporter, will be late following planting delays and unfavorable weather.
The December contract traded at a premium of 1.66 cents a lb over the March 2014 contract, up from 1.47 cents during the previous session, with the backwardated market seen as indication of concern over nearby supplies.
Exchange stocks dropped to about 469,000 bales, down by 49,000 bales from the previous session, according to the most recent ICE data, and at the lowest level since April.
Expectations that certified stocks will fall steeply over the next few months have added to the worry that demand in the first few months of the 2013/14 crop year may outstrip supply.
"In the short run, it's a bottleneck, and then all this cotton supply will pile on the March (contract)," Moss said.
The quiet mill buying reinforced concern that high prices will deter demand, especially with global inventories forecast to reach a record levels.
Though global stocks are forecast to continue to balloon in to 94.34 million 480-lb bales by the end of 2013/14, more than 60 percent of that is expected to become part of China's stocks and considered unavailable to the global marketplace, the result of a Chinese government stockpiling program begun in 2011. (Reporting by Chris Prentice; Editing by Peter Galloway)
