Market will probably stay in current trading range
As the week drew to an end, it appeared that the cotton market would be content to have one of the lightest volume weeks in well over a year and as a percent of open interest, possibly the lightest volume week in history.
Even though the market had demonstrated a lack of conviction, many technical traders had actually begun to turn friendly as the short term indicators such as the 7-9 day moving averages began to cross above the important intermediate indicators such as the 18-21 day moving averages.
In the past, this had turned out to be a fairly reliable indicator of a changing direction in prices. However, Never trust a dull market. Volume Friday was nearly as much as had been posted the first four days of the week. Friday was also the 19th consecutive session with prices consolidating within the trading range set on July 8th.
After chopping back and forth on either side of an unchanged week Friday morning, prices slipped into some sell stops beneath 74 cents and dropped 100 points in less than a minute and a full two cents from the morning highs. Before the dust settled the days range stretched out to nearly three and a half cents and all to the downside. The market nearly reached limit down once during mid session and actually did during the closing range before rallying off the lows by 100 points.
Through the week the market seemed virtually oblivious to several news items concerning cotton. The decision by USDA not to allow unpenalized, early withdrawals from the conservation reserve program went almost unnoticed. Additionally, the collapse of the WTO negotiations also went unnoticed.
The National Cotton Council said the talks failed to achieve a balance between agricultural support and market access sought by the United States. It applauded U.S. Trade Representative Susan Schwab for "refusing to settle for a bad agreement." The National Cotton Council added that U.S. negotiators were justified in their criticism of China and India for those countries' insistence on allowances to raise agricultural tariffs above current levels.
In other news, the Chinese government raised tax rebates on their textile exports to 13 percent from 11 percent, this should boost China's overseas sales of clothing. Chinese companies that had been forced to compete for domestic textile sales may again turn to overseas markets.
China had lowered export rebates on textiles and clothing incentives in the past two years as trading partners protested against its ballooning trade surplus. The appreciation of their currency, the yuan, And record commodity prices had raised their production costs, forcing many makers to close
Cotton prices broke very fast Friday when sell stops were triggered beneath 7407, the low end of Thursdays outside range session. No doubt cotton was already in a somewhat weakened state Friday with much of India receiving welcome rains, grain prices giving up what had previously looked like a winning week and the sixth consecutive technical failure above 7450.
If Friday's sell-off perked up the type demand we have previously seen develop on dips below 7200, there is a good chance that values will hold. From a technical standpoint, it is important for the bulls to recapture the 7350 area where key short and intermediate term moving averages were violated. A close below the recent 7078 low would open the door to a move towards 6700. Otherwise, we will probably stay in the current trading range a little while longer.
Swiss Financial Services