Old crop cotton futures on Thursday behaved in a manner consistent with recent pushes to new seasonal highs by closing down on the day. If the pattern holds, futures will pull back a bit, hold, then build a base and rally again to new seasonal highs.

Timing for when new highs will occur is a bit more tricky but, based on the May chart, every 10 days to 3 weeks is the pattern to date.

My technician, Dave, agrees. He says: “The reversal day in May Cotton looks a bit more ominous because it also rejected a new high; puts me in a defensive mode for a few days.”

What has been extremely positive through the past two weeks is the movement in the May/Jul spread. The higher May is an attempt to reflect limited supply and/or further ration demand. Whether the level of certificated stocks as first notice day approaches has the desired effect for merchants is unknown but it reinforces the bullish outlook.

The reasons behind higher prices or at least at current levels if maintained is principally the sizeable amount of cotton to be priced by mills per the on-call report.

Plus, the US export quote is not as competitive as it has been but nor is it the most expensive. Merchants are acting somewhat defensively with their offers to avoid over selling their inventory and any remaining available cotton. Weekly sales are likely to drop off going forward but until there are at least 1-2 weeks of net negative sales, we will not know just how high prices have to rise to completely shut off demand.

All the news is not bullish, given the sell-off in US stocks. A renewal of tensions between Russia and the Ukraine accounts for some of the drop but economic data from China for the past two months was alarmingly low.

Every sector of the Chinese economy was impacted, ranging from retail, manufacturing housing and investment per data from the NBS. Estimates for annual GDP were immediately cut (or will be) by various banks, investment houses, etc.

Chinese premier Li Keqiang held a press conference shortly after the NBS data release but his comments were mixed and he backed away from giving a minimum acceptable GDP growth level. China is the second largest economy and weakness going forward has long-ranging consequences for all of Asia and on the global stage.

Besides the macro situation, India and PakistanΆs prices are not enjoying the push to new seasonal highs in the US. Adverse currency movements explain some of the lack of upward movement along with mill resistance to the higher values.

In the miscellaneous column, last trading day for the May options is Fri, Apr 11 which is 4 weeks away. Currently, there are over 20K in the money calls but only 1,500 in the money puts. An imbalance of this size, even with a sizeable number of the call matched up beforehand, will pressure the underlying futures.

Finally, given the huge premium of July over December, mills and merchants will make every effort to ensure they buy/own only what they can consumer/sell. By the same token, ICE deliverable stocks will likely find a home due to the low carryout but merchants will take care to ensure they have home for any July deliveries.

Projecting a top is always difficult but getting through 94.00 (the 2012/13 high) has proven problematic thus far. I suspect it will be taken out but 95-96.00 should be a top with the May and most likely the July.

I am assuming any reduction in the crop size per the final ginnings report will be modest and additional export sales over the next 9-12 weeks will not exceed the USDA estimate by very much. Should China purchase more cotton than anticipated or production from Australia or Brazil falls short, the above mentioned range may not contain futures.

Sharon C Johnson, @Copyright 2014

The views and opinions offered in this report are solely those of Sharon C Johnson, an introducing broker for KCG Futures. The information contained in this report is taken from sources she believes to be reliable but is not guaranteed as to accuracy or completeness and is sent to you for information purposes only. Reproduction in whole or in part or any part or any other use without permission is prohibited.