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Cotton market drops sharply last week
11
Aug '08
Volatility in virtually every market reached absolutely unbelievable levels this past week whiplashing traders daily in moves that at times seemed completely irrational. Cotton collapsed the first two days, stabilized midweek as export demand picked up, recovered impressively on Thursday only to drop sharply as the week came to an end.

The early part of the week, commodity markets across the board were under tremendous pressure as rumors spread of forced liquidation by at least one fund. True or not, the carnage was widespread as the CRB Index of 19 commodities fell a shocking 1,400 points.

However, by Wednesday cotton fundamental demand did its job of detaching cotton futures from the weighty effects of the outside markets and the market closed with plusses . Then on Thursday, action in the cotton market was downright impressive as prices recovered smartly forcing buyers to have to chase the markets to get filled.

As the week came to an end, the US dollar roared higher for the largest one day increase since February which sparked another collapse in the CRB to five month lows. .

Even after an impressive close on Thursday, cotton bulls could not stand against the tide as traders moved money from commodities into the US stock market. Cotton gave up all the gains of the previous day and struggled valiantly to hold above the mid-week lows. As prices neared 69 cents, buying believed to be from a major Memphis merchant absorbed the selling.

When the smoke cleared, cotton was still down 272 points for the week at 6917 and the US dollar had scored its largest one week increase since January 2005.

Tuesday's USDA crop and supply/demand report will include a state by state forecast and give us a good starting point for production. It will also begin to clarify West Texas abandonment. Whatever USDA says on Tuesday, without a doubt, crop prospects were enhanced even more by beneficial weekend rains in the Lubbock territory including New Mexico, Arkansas and Louisiana. Wire services report extremely wide guesstimates of about a million bales in production, exports and ending stocks. However, world production, usage and carryout could well overshadow reaction to US production.

Technically, last weeks break negated the buy signal that was generated when the short term averages crossed the intermediate term moving averages. Then Thursday's strong close appeared to negate the 6700 downside projection generated from Tuesdays weak close. The multiple lows and closes around 6900 portend the "battle lines" between weak technicals and fundamental demand.

A close much below 6900 would signal resumption towards 6700. A move back above 7250 would violate the 20 and 21 day moving averages, cause a bullish crossover of the 20 day stochastics and provide a clear cut bottoming signal to propel Dec back towards 7500 and 7600.

Additionally, the seasonal pressure that has weighed on December cotton since June 21 officially comes to an end late this week.

The USDA crop report and World Agricultural Supply Demand Estimate and ramifications for the market will be the focus of discussion on this month's Ag Market Network conference call Thursday morning at 7:30 am. Listeners have several options. West Texas producers can listen live over KFLP 900 on AM dial.

Swiss Financial Services

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