I believe cotton prices are heading higher. If you have been reading my comments here, then you already knew that, but Wednesday’s price action only served to further convince me, as prices held up well on a decline to 5500, making a low in Dec of 5490.
From there the December contract returned and went on to new highs. Sure, there was then some selling, locals had set the push up to 5600 and into some scale-up trade selling, but that's only to be expected. And of course, I was disappointed with the close, but I liked the type of recovery we saw from the lows made yesterday. However, a move above 5665, or a close above 5635 would likely attract fund buying again, as the chart appearance would seem to justify the long side.
Hey, prices don't move straight in any one direction. It's rare that a market that moves in one direction for any length of time. Cotton traditionally experiences ebbs and flows on its way to finding value. And the value as I see it for cotton works in favor of higher prices for cotton. I think that Dec is headed for 6000, and maybe 6200. In fact, I think May cotton will stand a good chance of going higher than that.
Why? Well, I like that during the previous three years cotton prices have bottomed around this time of year: Aug. 18, 2003, Aug. 15, 2004, and Aug. 19, 2005. So, from a historical standpoint, there is reason to expect the potential for a similar bottom to occur again this year.
This is simply another reason to add to my list of why I like the long side. Another is that many of the supply side bulls seem to have liquidated their positions over the past few days. They've had enough. They've taken their licks and have gotten out. Their liquidation however, only served to assist in helping prices retreat back into key support. And that support has held. In fact, that support provided a good spot yesterday from which to launch a decent rally. Yes, cotton closed weakly and down on the day, but overall, I still like it.
I favor the long side of cotton because I fervently believe that the fundamentals, the supply and demand, will corroborate to favor higher prices. I still regard the current U.S. crop as a poor one and smaller than the latest USDA report suggests. I also feel that quality will become a more important factor. I can't blame those compiling the data. They only perform the task of crunching the numbers. However, human nature suggests that since they had lowballed the previous three years of crop data. Maybe this year, facing a declining crop, they prepared to err on the side of caution, allowing for increased yields like those they had seen the past couple of years. Hey, it's no surprise that seed quality has enhanced yields.
In addition, I'm bullish on the demand side of the market, and even though we may not have witnessed any substantial recent demand, that's not altogether unusual this time of year. Sure, at this time last year things were different. Last year demand was already evident. Since we haven't had a repeat yet this year, it's only customary to be disappointed. But, in my book, demand will continue to be robust. Economic developments, especially in China and India, convince me of that. I even think the U.S. economy isn't doing so badly. Stocks may even begin to reflect that, as the stock market has shown a little life during the last few sessions.
Anyway, option activity today was overridingly friendly towards higher prices, at least until about 12:45 or so, when some bearish stuff occurred. But, as I said earlier, that was a function of the ebb and flow. The bearish stuff seemed to be more motivated by profit taking; you know, buying back short puts. And that action took place around the same time Dec had reached 5600, so that could be expected as well. Remember, that was an area where scale-up selling was noted.
The Dec/March spread traded between 310 and 320, as locals seemed to piggy back the buying of March verses selling of Dec. There again also seemed to be substantial paper interest at 310. The Oct/Dec spread traded 200 to 190. The Dec'06/Dec'07 spread traded from 670. March/May went 80. There seems to be increasing interest in spreads.
Moving Averages
December (5528)
March (5849)
Options Month
Implied Volatility
9 Day
56.23
59.12
Sept.
26.00%
18 Day
55.97
58.87
Oct.
26.00%
40 Day
54.75
57.61
Dec.
26.00%
100/200 Day
56.00
58.44
March
24.75%
57.19
n/a
Futures
Calls
Puts
May
24.00%
12,230
3,000
3,000
July
23.25%
Look for:Support at: 5480, 5428, 5416 and 5405-5383Resistance at: 5560, 5601, 5665, 5705, 5727-5741, 5769-5780, then 5807, and 5945 .
I suggest considering getting long December cotton futures on dips and risking a close below 5370. My objective is tentatively around 6000.
Jurgens Bauerjurgensb@gmail.com
(212) 748-1388 floor(973) 378-8379 fax(973) 652-4694 mobile
