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Cotton market fundamentals continue to look bearish
May '08
Cotton traded in a similar trading range as we continue to find strong resistance near 72 cents. Volume was light with only 12,000 futures and 6,000 options as we are unable to breakout of the trading range established on May 1st. Inquiries are still active and there should be another good sales and export report this week although maybe not as strong as the recent two weeks.

Mills are still buying hand to mouth so in case prices do not go higher soon, we may see a pull back in demand waiting for lower prices. However, at the moment we still have a huge spread to December so mills will be nervous not to cover at least until the third quarter which should keep the market firm short term.

Soybeans also had a strong day and both cotton and soybeans have crossed upward on the MACD which is friendly and may trigger a run at some buy stops later this week (notice MACD below). Along with new record highs in oil, cotton and soybeans should have some room to the upside but may run into some scale up trade selling. Short term we still need to break through the 72.43 top set on May 1, but longer term 75 cents is a good target and 83 cents in the Z'08. The specs were basically unchanged today with their long position going down from 11.6% to 10.4% long but for the most part they continue to sit on the sidelines with open interest growing slowly to only 252,000 contracts.

Cotton market is still looking very fundamentally bearish, but technically, we broke the strong support line at 70 cents in N'08 last week. The MACD has also made a positive cross in the recent sessions, which is normally a buy signal. However, the movement suggested by the MACD cross needs support by decent trading volume coming from spec buying activities, which we have not been able to seen lately.

We first need to break that high set at 72.43 before we can pursue further upside targets heading towards significant resistance near 75 cents. Grain and energy prices will continue to offer major influence on the cotton market this week.

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