Cotton continues to follow grain prices in volatile activity as we fell almost 150 pts based on weak CBOT markets in corn, beans and wheat. However, by midday the losses were curbed and cotton came back almost to unchanged based on fund buying and friendly options.
Volume was strong again today with 31,000 futures, but 44,000 options which is another explanation for the uncertainty in the market short term as we fight for 08/09 acres. We are still above the low for the week and holding above 70 cents where the market opened on Monday in route to a limit up session. Depending on grains we may try to test the highs again near 73.00 as there seems to be good fund support near 70 cents.
Business still remains slow, but inquiries have been more active on this last pull back as mills are nervous and need to cover some deliveries for nearby shipment. However, there was a story out of China today which emphasized the concern over inflation as the price index rose 6% last month which forced them to raise interest rates by 50 basis points and set price controls on food products to control rising prices.
Mills are looking at raw cotton prices which are over 30% higher than last year at this same time. That along with falling consumer demand has created a perfect storm for the cotton mills which have to chase the rising cost of cotton due to the energy crisis, but unable to recover the difference in flat yarn prices.
Obviously, the technicals are still positive, but we do have the RSI back near 70 and the business remains weak. Fundamentally, there is no reason for the market to go higher, but we are in the middle of a fund driven spec rally which the trade are unable to control. After some weakness early in the day, it looks like we may be setting up for a short term sideways trading range between 70/73.
We could establish a short term flag pattern which will eventually break out to the upside or downside depending on where grains trade nearby.
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