By Sharon C. Johnson, Analyst, KCG Futures, Atlanta, Georgia

The past 3 days with US cotton futures have seen sizeable swings, if not in the daily range then with the settlements. if not both.

On Friday, March 21. the May closed at a new seasonal high but did not make a new high, typically resulting in a pullback the following day for cotton futures.

Monday, March 24. saw futures ease down as expected but unlike previous tests of the 10-day moving average, this break was far more meaningful, with a closing drop of 3.7%. Closing below the 10-day and giving up as much ground as the May did, additional follow-through to the downside was anticipated although the big question was by how much more?

Whether mill on-call pricing was a factor or spec funds had divested enough newly gotten longs, additional buying and a lack of selling in todayΆs session was sufficient for the low (89.90) to hold a few ticks above MondayΆs (89.84). As noon EDT approached, futures rallied 75-100 points, presumably to further price in NASSΆ final ginnings report.

The report indicated a 320K bale drop in the US crop to 12.87 mln statistical bales, a figure that will be picked up by the WAOB and every other USDA agency going forward. Initially, futures pulled back some since the production cut was no surprise but stayed above unchanged. At or near 1: 15 p.m. EDT, that all changed. Futures began charging higher and within 30 minutes the May and July had touched limit up, a gain of 400 points.

Massive buying stops were hit above 92.00, 92.50, 93.00, 93.50 and especially 93.75, the previous seasonal high. In the 45 minutes that cotton jumped by 300 points, nearly 10,000 contracts traded. The rally caught everyone off-guard and may explain why the run-up occurred as quickly as it did and to the degree that it did.

Those spec funds that bailed on some of the longs and may have added some shorts yesterday did a very quick about face today in the last 2.5 hours of trade. Unlike Friday, March 21, the May hit a new seasonal high of 94.63 and closed a new seasonal high of 94.11. TodayΆs action received the extra boost from specs once the seasonal high from a year ago was exceeded. On March 15, 2013, the May contract traded up to 93.93 and the July to 94.20.

Early estimates of volume is 31-32,000, less than the 36,000 traded on Monday. Unlike on Monday, open interest should show an increase, although if it proves to be only marginal, our idea of sizeable short-covering will be proven.

As to why there was such an extraordinary turnaround today, it could be once traders applied the new crop figure to the US balance sheet, with no change to other components, ending stocks are reduced by 320,000 to 2.48 mln bales. With no change to demand, the WAOB will use this figure in their monthly April 9 supply/demand report.

Confirmation of carryout falling to its lowest level since 1990 may not have been a new revelation but did send a strong bullish signal to the market. The marketΆs job has grown more difficult, to ration the reduced supplies and the only way to do so is with higher prices. Unfortunately, mills will have to ratchet up their buying levels for on-call contracts and the combination is likely to lead to further upside movement. That said, 96.00 remains my near-term objective but increasingly a push closer to the 1.00 level may unfold, given todayΆs performance.

My technician, like many, is confused and had to rethink his negative if not bearish bias from yesterday. Here is his latest comment.

“What the @#$%* happened to May Cotton on Monday? It looks out of character with the rest of the chart. Sigh, forget everything I said yesterday.” I would give cotton futures a day or so to either consolidate or retreat, but the market should make its intention known shortly.

©2014, Sharon C Johnson, Senior Cotton Specialist, KCG Futures, Atlanta, Georgia USA