NY futures up despite gloomy economic outlook

09 Sep '11

5 min read

Although no quantitative limit has been set, we assume that the Reserve will try to replenish most of the 16.5 million bales it released into the market between May 2009 and October 2010. At a minimum we would expect this buffer stock to grow to around 3 months of domestic mill use, which would amount to roughly 11-12 million bales. This Reserve buying will feel like additional demand to the market over the coming months and should counteract any bearish forces stemming from a global production surplus this season.

While fundamentals created a solid base, it was chart-related buying that provided the fuel for this rally. The market had plenty of opportunities to sell off over the past few weeks, but instead it managed to linger not far below resistance at 109 cents and it was therefore just a matter of time before the market would try to take out this level again. While earlier attempts failed, the conditions seemed right this time, because the trade was either no longer willing or able to absorb renewed spec buying. Yesterdays move triggered new buy programs and as a result we saw heavy follow-through buying today, with volume estimated at nearly 30'000 futures.

So where do we go from here? Although fundamentals look somewhat supportive (trade short, Chinese Reserve buying, weather), this was clearly a spec-induced rally and it remains to be seen whether the current momentum can be sustained in order to extend the up move. This means that we need to see strong volume and rising open interest over the coming sessions. Failing to do so, the market will probably run out of steam and fall back to the breakout area.

The specs of course hope that trade shorts will be forced to cover, which would provide additional fuel to the market. However, cash prices seem to resist this latest advance and it would probably take another weather event to scare the trade into chasing after prices. Also, the fact that October is starting to lose ground against December should be seen as a warning sign. Therefore, until proven otherwise, we shall treat this rally as an extension of the recent sideways trend rather than the beginning of a new bull market.

Plexus Cotton Limited

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