Cotton prices may touch a seasonal low

25 Aug '08

2 min read

After spending three light volume sessions trying to bounce off 67 cents, December cotton finally broke through to the downside mid-week, hitting sell stops and attracting fresh selling that took that contract to lows not seen in almost a year.

However the break went nowhere and in fact turned out to be a bear trap. Prices reacted to one of the most reliable technical indicators, an outside range reversal, by rallying nearly 3 ½ cents over the next two sessions.

Traders were hard pressed to attach cotton's late week rally to any news story concerning supply demand fundamentals.

Then as the week came to an end the action in cotton was actually quite impressive considering the extreme weakness in the outside markets Friday.

However, despite the sharp 1,100 point sell off, the CRB still closed an impressive 1,200 higher for the week. In fact commodity prices retreated globally Friday, erasing most of the previous days gains. The end of the week break seemed to be sparked by the sharp drop in crude oil and a corresponding rally in the US Dollar.

Cotton, on the other hand, more or less ignored the other markets and closed only slightly lower on the lightest volume in four weeks. December cotton lost 21 points Friday settling at 6963 but that was still up 255 for the week.

The cotton markets inability to establish a sustained move in either direction has been evident in the weekly spec/hedge report. The speculator seems to have waffled between being very slightly net long to being very slightly net short the last five or six weeks with neither side showing a lot of conviction. Commercials on the other hand have reduced their market positions on a fairly steady basis.

Last week's bounce came from 6700 which had been the downside target at 6700. However, it will now take a close above 7145 to silence skeptics and attract the type bullish technical following to challenge major trend line resistance between 7400 and 7500.

While a number of analysts feel that cotton is in the process of making a seasonal low, the tremendous amount of cotton hanging over the market has been a real drag on the market's momentum on each rally attempt. As we said last week and will continue to remind, it is an absolute certainty, cotton will eventually participate in the acreage battle for the 2009 crop.

Swiss Financial Services

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