COTTON Analysis – Weak Chinese demand bearish for cotton prices

By IFCMarkets

Weak Chinese demand bearish for cotton prices

Slow sales at China state cotton reserve auction signals weak demand in China. Will the cotton price continue declining?

China sold 13,200 tons of cotton at auction of state reserves at an average price of 14,624 yuan ($2,127.72) per ton on September 26. Only 40% of cotton available for the auction found a buyer. China holds daily auctions running through September 30 starting from spring to ensure ample supply for domestic consumption. It is the top cotton importer in the world, China accounted for 17.3% of global cotton imports in 2017. The second biggest importer – Bangladesh, imported 10.7% of global imports of the fiber. Tepid sales at China’s state reserves auction signals weak domestic demand for cotton, which is bearish for cotton prices.

The International Cotton Advisory Committee estimates that high 2017/18 season cotton prices are expected to result in moderate growth in global planting for 2018/19, which starts in August. The planted cotton area in US is expected to increase due to new support policies for the crop, expanding by 11% to 5.08m hectares in 2018/19. Cotton price is supported by strong Chinese demand for the crop, and China has decided to extend its reserve auction to sell cotton stocks by one month through September. And the US Department of Agriculture current forecast suggest that ending stocks outside of China will increase in 2018/19, which will help offset rising Chinese demand. Forecasts of increasing cotton planting area are bearish for cotton prices.

On the daily timeframe the COTTON: D1 is below the 50-day moving average MA(50) which is falling, this is bearish.

• The Parabolic indicator gives a sell signal.
• The Donchian channel indicates downtrend: it is widening downward.
• The MACD indicator gives a bearish signal: it is below the signal line and the gap is widening.
• The Stochastic oscillator has breached into the oversold zone, this is bullish.

We believe the bearish momentum will continue after the price breaches below the lower boundary of Donchian channel at 77.62. This level can be used as an entry point for placing a pending order to sell. The stop loss can be placed above the upper Donchian boundary at 84.23. After placing the order, the stop loss is to be moved every day to the next fractal high, following Parabolic signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. If the price meets the stop loss level (84.23) without reaching the order (77.62), we recommend cancelling the order: the market has undergone internal changes which were not taken into account.

Technical Analysis Summary

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