After stair-stepping four cents higher last week, the market finally ran into some resistance, but it still managed to stay above the technically important 82.00 cents level.

The latest CFTC report confirmed that speculators were the driving force behind the market’s advance, as they bought nearly 11’400 contracts net between December 4 and 10, while the trade was on the other side selling over 10’700 contracts, with Index Funds accounting for the difference with net sales of 700 contracts.

However, since the market had its biggest move on December 11, we are likely to see another large increase in spec longs and trade shorts in tomorrow’s CFTC report. We estimate that speculators are now close to 2.0 million bales net long, while the trade has probably boosted its net short to around 8.0 million bales, with Index Fund longs making up the remaining 6.0 million bales.

Speculators certainly have plenty of room to expand their net long if they decided to do so. Earlier this year, during the rally in March, speculators carried a net long of nearly 9.8 million bales. However, with momentum indicators still flashing overbought signals, specs are in no hurry to chase the market higher and instead prefer to wait for pullbacks before committing additional funds.

The trade has been a steady seller into this rally, as producers in a number of origins have made additional supplies available, which merchants bought and hedged with short futures. This has resulted in an increase in the ‘basis-long’ that merchants own, but with basis levels weakening it is doubtful that this position will continue to grow.

The problem with basis-long positions of non-US origin is that the long side consists of physicals that are still in abundant supply (Indian, West African, Australian, Brazilian, Central Asian), while the futures short resides in a fairly tight US market. We therefore believe that as a next step merchants may want to unwind some of their basis-long, which requires the buying back of futures and thereby adds to underlying support.

The increase in on-call sales constitutes another element of support. As prices are headed higher, mills prefer to buy their supplies on-call in the hope of fixing the price at a more favorable level down the road.

Last week alone on-call sales increased by 386’000 bales and they now amount to 5.34 million bales, whereof 4.9 million are on current crop March, May and July. Many buyers still don’t seem to realize that they are essentially taking a short position in the US market, which is getting tighter with every week of stellar export sales.

US export sales for the week that ended on December 12 were once again surprisingly strong at 242’200 running bales for the current marketing year and 6’600 bales for 2014/15, with a total of 17 different markets wanting a piece of the action. For the current season we now have total commitments of 7.3 million statistical bales, of which 2.7 million bales have so far been exported.

The US can’t keep selling at this rate, which is why prices had to move higher. However, we will have to wait until next Thursday before we can gauge the current pace of sales, since the above number encompasses a price range from 78.85 to 83.13 cents and we therefore have no way of knowing at what level these sales were made.

Chinese imports of raw cotton amounted to just under 800’000 statistical bales in November, bringing the total for the first four months of the marketing year to 3.63 million bales.

With the December number likely to be larger as shippers are trying to beat the looming deadline, we believe that total imports since August will be close to five million bales by the end of this month. It is therefore quite conceivable that China will get to 11.0 million bales of imports as predicted by the USDA, considering that there will be a 4.1 million bale Tariff Rate Quota (at one percent duty) and probably some additional processing and/or sliding scale quotas available in 2014.

So where do we go from here? The market seems to have a lot of underlying support from speculators as well as the trade. With the chart looking constructive, speculators have plenty of room to add to their net long and will likely do so on dips.

The trade may wish for the futures market to move lower, but because of the advanced stage of US sales, the unwinding of basis-long positions over the coming months and the large amount of unfixed on-call sales, the trade is probably going to be a net buyer of current crop futures for the remainder of the season. In other words, for whatever the reason may be, there are currently more traders inclined to buy the market than to sell it and until this situation changes, the market is likely to remain on a firm footing.

However, even though the market may maintain its current price level, merchants will try to force carry back onto the board by boosting the level of certified stock over the coming months. This morning the certified stock amounted to less than 42’000 bales, but we expect this number to grow considerably next month. We therefore see a market that will continue to trade in a relatively tight range between 80 and 85 cents, but with March starting to slip below May.