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NY cotton futures move sideways this week
28
Feb '14
It was a rollercoaster week in the futures market, as May traded in a 432-point range between 90.44 and 86.12 cents before ending the reporting period more or less unchanged. The market seems to be torn between bullish and bearish impulses and we would therefore like to review this week’s volatile trading in order to get a better sense for what’s ahead.
 
The market’s first move was to the upside, after it became clear on Monday morning that the certified stock, or at least the vast majority of it, would not be relinquished by its owners. There were no notices issued until Wednesday, when 62 lots or 6’200 bales were tendered, but with open interest down to just 163 contracts as of this morning, the March delivery period is all but history. 
 
The fact that hardly any certified stock was made available at 86/87 cents seemed to make the still sizeable contingent of May and July shorts nervous and sparked some short covering on Monday.
 
However, the move above 90 cents proved to be short-lived and upside momentum quickly stalled, setting the stage for a couple of weak sessions on Tuesday and Wednesday. Until now speculators have done most of the heavy lifting in getting the market from 75 to 90 cents since November, and in order to keep this uptrend going, trade short covering will eventually have to kick in. 
 
However, since the trade just rolled its short from March to May, it currently feels no pressure to jump into action and get out of its position just yet and instead keeps kicking the proverbial can down the road. 
 
When the market fell below its three-month uptrend line on Tuesday it triggered sell-stops, which flushed out some of the spec longs. The market tried to reclaim the trendline on Wednesday and failed, which led to additional long liquidation. However, while the chart action was bearish, the persistent May/July inversion contradicted the move and that may have prompted fund managers to cut the market some slack.
 
The relatively small drop in May open interest of just 2’966 contracts over the last two sessions tells us that this long liquidation wasn’t nearly as severe as it could have been. Today a pick up in physical activity and renewed spec buying finally reversed the decline, lifting the spot month back towards the 88 cents level. 
 
Last week’s US export sales of ‘only’ 42’000 bales of Upland and Pima cotton were seen as disappointing by most commentators, but we don’t necessarily agree with that view. Since we estimate that only around 1.5 to 2.0 million bales remain available for sale in the US, assuming that some two million bales have to be put aside to meet ‘August onwards’ obligations, lower weekly sales figures may actually have more to do with a lack of suitable offers than with a lack of willing buyers.

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