Fine Cotton was the name of an unimpressive racehorse in Australia. The poorly performing horse was replaced with a much superior look-alike substitute, which won a major race at long odds. The same switching tactics have been seen with the Indian government position on cotton export sales and the results are very similar. It has little impact on the fundamentals of the market.
The weekly chart provides the best perspective on cotton. The 2010 and 2011 price action was dominated by two parabolic trends. These are typical of speculative markets fueled by cheap capital.
The collapse of parabolic trends is usually in the order of 40 percent to 80 percent. The first parabolic trend collapsed from 160 U.S. cents a pound to 110 cents – losing 31 percent. The collapse from the second parabolic trend was more dramatic with a 33 percent loss from 225 cents to 150 cents and later a 62 percent loss when the price dropped to 85 cents. This is a similar behavior to the collapse in oil following the same type of parabolic trend pattern.
The collapse tells us that the speculative heat has been taken out of the market and the market has returned to longer-term support and resistance levels. This is the key determinant of the current environment.
Manipulation of export licenses will not boost cotton prices back to 200 cents and higher because this was a function of cheap capital and general commodity speculation.
The strong resistance barrier is at 100 cents. Support for the current trading consolidation is near 85 cents. A fall below this level has long-term historical support near 68 cents.
Any breakout above 100 cents has initial resistance near 115 cents.
However, the general trend pressure is bearish and this suggests continued testing of support near 85 cents. This is a sideways trading consolidation band with no dominant trending pressure. Putting in new export polices is no substitute for the fundamentals of this trend behavior. It provides a temporary boost, but the true nature of the trend behavior will win out.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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