It was an inside day in New York cotton trading today. The range for December was conspicuously narrow compared with the previous two days, which may be due to some welcome consolidation. Or is it telling a story? At any rate, most conspicuous was the absence of any real volume and follow-through buying from specs. This was especially true given that December is now well above the 100-day moving average. By and large, one would have expected that alone to attract additional interest on the buy side. One traditional trade house acquired 500 December’s over the course of the day, but that was likely for a fund.
The trade was seen as a humble seller on strength, while spec funds bought. Options volume was brisk early, with some early volume in the Dec 57/52 put spreads getting bought. Although that seemed bearish, there were also some calls bought too, most noticeably the Dec 60 and the Sep 58’s. Also, volume was seen acquiring the March 54 puts against the Dec 54’s as well as the March 54’s verses the Dec 50’s. Dec 70/March 75 calls spreads went at 35. 100-200 Sep 56 fences traded and late in the day 160 of the Dec 57/54 put spreads were bought late at 143.
For much of the day the locals were mixed and on both sides of the market. The price of December seemed able to hold the 5630 area, as it did yesterday. But it also didn’t manage to reach above the high of 5685.
This suggests that there are two distinct views of this market: it could be that this is a bull market and prices need to take a rest before regaining, or building, sufficient momentum to challenge the upside. Admittedly, the charts offer a friendly tone and technically the market looks poised to move higher. Yet it’s also been a while since cotton has been viewed as bullish, so suspicions regarding this move upward are surfacing and caution is increasing.
On the other hand, there is reason to expect that prices simply needed to seek a higher level in order for cotton to be redeemed out of the loan. This certainly makes sense, for we’ve seen trade scale up selling, and the market always goes to the price level where the most business can get done. However, there has been no new news regarding demand.
We have seen some recent decertifications, which may be the result of the elimination of step 2, or a re-shuffling of vintages and grades. Who knows? The big story on the day remains the lack of follow-through volume. Where were the buyers? A healthy bull market may be forming, so corrections are welcomed. Surely, the crop report should show further evidence of the U.S. crop under stress, but yields may still surprise. What’s needed is some better perspective on the demand side.
Technically, the market looks like it wants to go higher, (another reason to be suspicious), but there are still some hurdles to face. In my book, Dec needs to close above 5722-5749. If it does, then I could see December over 5900.
I’m encouraged by:
The way cotton seems to behave, it continues to hold above 5630
I especially like the fact that Dec shows resilience from dips
Positive slopes of the short term moving averages
A bottom appears in place
Continued talk of reduced crop estimates
The short covering has been orderly
I’m cautious because:
It is healthy to digest recent gains
We still haven’t received any significant demand news
I wonder how much of this rally is based upon a bullish crop report
The Dec/March spread traded between 275 and 271 and has been getting weaker, Oct/Dec 185, while the Dec’06/Dec’07 spread, traded between 605 and 610.
Look for:
Support at: 5650-5630, 5610-5585, 5528, 5470, 5428 and 5405.
Resistance at: 5690-5700, 5741, 5769-5780, then 5824, and 5948.
Moving Averages
December (56.76)
March (59.57)
Options
Volatility
9 Day
55.43
58.36
Sept.
24.00%
18 Day
54.23
57.16
Oct.
26.00%
40 Day
55.11
57.89
Dec.
26.00%
100 Day
56.20
58.68
March
24.75%
Futures
Calls
Puts
May
23.50%
25,000
3,400
5,400
July
22.50%
We will soon be providing a similar report for coffee traders. Today coffee rallied on aggressive spec and fund buying, with a lack of selling once Sep broke into stops above 100. Volume was brisk at 29,086 contracts.
