However, even though it felt good to finally see the market up on Wednesday, the rebound was not inspiring at all, since the market closed nearly 200 points off the high after briefly touching limit up and the lack of any follow-through on Thursday makes this rally attempt look like a ‘dead cat bounce’ rather than the beginning of a trend reversal.
The latest CFTC report, which includes delta-adjusted futures and options positions as of October 29, confirmed that it was indeed heavy spec selling that pushed prices lower after the market broke through key support at 81.71 cents.
In the five sessions from October 23 – 29, during which the market dropped by 417 points, speculators large and small sold a total of 29’360 contracts net, while the trade was on the other side buying 30’173 contracts net. Index funds accounted for the difference, reducing their net long by 813 contracts.
Over the past four weeks speculators have cut their net long position from 55’098 contracts to 1’107 contracts, a massive drop equating to 5.4 million bales. No wonder prices have been under so much pressure during October!
The good news from a bullish perspective is that speculators are now a lot less involved, although they still own outright long and short positions of 4.8 million and 4.7 million bales, respectively, enough to play a role in rallies and selloffs. By comparison, around the middle of August speculators were still a much bigger force in the market with 11.5 million longs and 2.7 million shorts.
With speculators moving to the sidelines, the fate of the market is now primarily in the hands of the trade, who carried a 9.4 million long and a 16.2 million short position as of October 29. Outright trade longs grew quite rapidly during the recent decline, which is at least partly due to the many puts that traders had sold earlier in the belief that the market would stay range bound. A falling market increases the ‘delta’ of short puts and thereby generates a bigger long position, which forces traders to play defense by either rolling short puts down or by selling futures. This exacerbated the selling pressure and helps to explain why the market had such a long string of down days.
The tide started to turn once the market approached 75 cents, as spec selling subsided, there were fewer puts left to defend against and physical business picked up. As merchants were increasingly able to find buyers for their basis-long positions, it required them to buy back short futures as part of the deal. In other words, instead of everyone leaning on the sell side, we once again had a more balanced trading environment.
US export sales reports show that about a million bales of Upland and Pima were sold over the last four weeks. Last week alone we had net sales of 306’800 running bales, with Turkey and China accounting for more than half.
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