NEW YORK, Dec 14 (Reuters) - U.S. cotton futures soared to
their 5.0 cent daily limit on Tuesday, then pulled off those
highs by the close, but still held near their highest levels in
over a month on a positive demand outlook for China.

Cotton raced higher at the open, playing catch-up to the
rally overnight when it surged to levels unseen in over a
month. Buyers in top consumer China had continued betting that
supplies would not be sufficient to meet demand brokers said.

Technical buying took over when a large gap was left open
on the March cotton chart, as buyers in early Tuesday business
started the contract at levels well above Monday's high.

Chinese buyers continued trading cotton higher from the 4.0
cent upside daily limit reached in Monday's session.
Benchmark March cotton prices on ICE Futures U.S.
rose the 5.00 cent daily limit at $1.4597 per lb, the highest
level for a second position cotton contract since Nov. 10.
March futures later pulled off the high to finish at
$1.4449, up 3.52 cents, or 2.50 percent.

Volume for the contract was healthy at 14,386 lots by 4:20
p.m. EDT (2120 GMT). At Monday's close, total volume came to
12,494 lots, below the 30-day average of 34,500 lots, Thomson
Reuters data showed.

Cotton has been the best performing commodity in the
Reuters-Jefferies commodity index, up 80.2 percent for the year
to date.

(Graphic: http://link.reuters.com/kew48n)

Monday's rally was ignited by the lack of interest rate
increase by the Chinese central bank.

Over the weekend, China released its latest slew of very
strong economic readings that suggest demand for cotton would
remain strong. For November, year-on-year retail sales shot up
18.7 percent and industrial production surged 13.3 percent.

At the same time, a hefty rise in China's inflation
readings prompted many investors to conclude that China might
raise interest rates to slow the rapid pace of economic growth
there, but that did not happen.

Instead, China raised reserve requirements affecting banks,
but not benchmark interest rates impacting the wider economic
activity, easing worries of a slowdown in top consumer China.

On Tuesday, independent cotton analyst Mike Stevens in
Mandeville, Louisiana noted, Chinese yarn market production for
November posted its second highest gain on record, and was just
under August's all-time high.

'Things obviously are not slowing down in China. In
response, Chinese prices were higher overnight spilling over
into New York trade,' said Stevens.

In China, cotton prices went up on Tuesday with May cotton
futures last at 28,035 yuan per tonne, up 805 yuan.

Brokers noted overnight business left a large gap on the
March cotton chart, ranging from Monday's high at $1.4097 to
$1.4295 Tuesday's low.

Some brokers pointed out cotton's fast-paced gains of 34
cents over the last 2 weeks might be setting the stage for a
sharp correction.

But Stevens added, 'Only a close today back below
yesterday's $1.4097 high would give even the slightest hint
that a pullback might be imminent.'