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Cotton continues to follow outside markets
13
Jun '08
We were expecting some strong follow through buying after yesterdays locked up limit moves in grains and cotton. However, the dollar bounced back and crude fell lower which put pressure on cotton and the grains.

We did manage some small rallies near the end of the day, but cotton was not able to close above 70 cents. As the spread has narrowed, N'08 open interest has been falling rapidly to only 73,500 as of this morning as spreads closed below 700 pts from the widest level at 901 pts.

Volume was very strong again today with 64,000 futures and 12,000 options as cotton continues to follow outside markets. Export sales came in stronger than expected with 430k in sales and 320k in shipments.

We have fallen into a weather market which is the main driver for grains and cotton. The expiration period is setting up to be a good spot to set a seasonal high as we are very concerned with current growing conditions in Texas as well as grains up North.

This combined with some aggressive takers for the N'08 contract could squeeze N'08 off the board at very friendly levels. However, once the market realizes we are unable to generate business against V'08 near 75 cents or higher, the overbought conditions in several of the commodities could lead to a pull back once we get through the early crop concerns.

Technically, the MACD is crossing higher this week and RSI has room to go higher at 55. The upside resistance gets stronger above 70 cents but after breaking the downside trend channel, the next serious resistance is at 72 cents. With such a strong bounce in commodities across the board, the low established on Tuesday at 63 cents should hold up through expiration.

We are setting up for a seasonal high in the short term as all commodities are testing contract highs or on them. Cotton will continue to follow the grains and other commodity prices higher as the dollar and equity markets struggle.

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