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Cotton market fundamentals continue to look bearish
13
Feb '08
Cotton continues to follow the grains up, down and sideways and today it happened to be down. We absorbed some option expiration selling on Monday and managed to close above 67 cents. We also made a run at the lows today based on further weakness in grains, energy and metals despite a friendly bounce in the stock market.

Trade buying came in on the lows to support the market, but eventually failed and closed in the middle of the range. Volume was strong with 40,000 futures and 15,000 options as the main feature continues to be the roll from H'08 forward as K'08 has now become the month with the largest open interest.

Spec hedge numbers confirmed a mostly unchanged position for the spec longs at 24.5%. Open interest did come down today and will continue to be under pressure into the delivery period as you can see the breakdown on page 2 in attached PDF. Cert stocks continue to grow with 530k and 75k awaiting review as this will encourage spreads to stay at full carry and better.

The cotton market fundamentals continue to look bearish, but in the end, we will have to get a correction in grains to have any chance of a sustained pull back in cotton. At the moment, the H'08 delivery does not look like it will put up a fight and we will probably see a smooth transition to K'08 as the market grinds lower and we wait to uncover fresh demand for second quarter.

The moving averages continue to get closer to crossing which may give the technicalsignals for more sell stops. We did close below the 50 day moving average which is close to 50% retracement and may uncover some more sellers if demand does not surface as China is still in holiday mode.

We continue to see good scale down trade buying under 66.50 and bounced back close to 67.50 before closing weaker. Fund rolling will continue with only 7 trading days before FND, and unless there is a stopper, we may continue to test the downside.

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