NY cotton futures extend rally this week

The biggest concern we have in regards to this large trade short position is the US crop, which seems to be getting smaller and probably has some quality issues due to the wet and cool conditions in the Mid-South and Southeast this season.

Any further deterioration of the US crop could spark some panic among traders, which wouldn’t be pretty considering that we have a record open interest for this date in December at 166,457 contracts. Unfortunately the just released Accuweather forecast for Fall 2013 doesn’t look very reassuring, since it calls for flood woes in the Southeast to continue and for severe storms to linger in the Mid-South.

So where do we go from here? After the market has broken above the upper band of a six-month sideways range this week, it is now challenging important resistance areas on the weekly chart, the 93.93 cents high, which was set in March and the 92.58 cents high that was posted in June. A break above these levels would probably spark another round of spec buying and possibly some trade short covering.

However, failing to supply this bull market with additional buying in the days ahead may stall momentum and force prices to retreat. The specs have already spent a lot of bullets to get the market above 90 cents and while they may be able to commit additional funds to their cause, they ultimately depend on the trade to take the market higher from here, but unlike in 2008 the trade may not oblige this time around.

Plexus Cotton Limited