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Drop in worldwide prices of cotton continues
Oct '08
After moving slightly more than ten cents above the AWP, cotton began last week with a record setting 602 point swing on Monday to the downside. Cotton prices then began to successfully distance themselves from outside markets in near schizophrenic fashion. On any given day stocks would be up and cotton down. The next day, stocks would be down and cotton up.

Even more confusing were the Dec/March differences. Generally speaking, as the market moves toward the delivery period, any changes in the differences between the spot month and the next often reflect changes in the fundamental situation. In this case, the December to March spread closed to the tightest level in the life of the contracts only to shoot skyward on Thursday. This sudden change in the difference between these months invoked a lot of talk but no answers.

Panic liquidation continued unabated in both equities and commodities. The CRB Index dropped to lows not seen in five years; the Baltic Dry Freight Index six years. Fridays break in the CRB Index was the 23rd such in the last 29 sessions. Crude oil settled at a 17-month lows despite OPEC's decision to cut output by 1.5 million barrels a day. On the other hand, the dollar index has gained during 19 of the last 24 sessions.

Cotton futures, which have lost ground 26 times in the last 38 sessions for a total of almost 24 cents, settled on contract low closes. Losses were not limited to the US as China's cotton prices continued to drop as well. So far the NDRC attempt to stabilize prices has had little effect.

The fundamental outlook took a sour turn last week when Cotlook reduced its estimate of global usage to 115.5 million bales, a reduction of 2.5 million bales from its month earlier estimate and a whopping 6.8 million bales below USDA's October estimate. They cut Chinese usage about 900,000 bales below their month lower estimates and are now about 5 million below USDA's view of Chinese needs.

Technically, the near term objective of 5400 was met a week ago. However, the bounce was only a two day phenom. Additionally, the buy signal generated a week ago by the 20 stochastics was negated Friday.

The markets indecisiveness is indicative of a period of consolidation. Right now it would appear that the best the bulls can probably expect is a consolidation of prices between 4550 and 5250. A new low close would portend at test of 4300. The 20-21 day moving averages are coming down quickly so a close above 5250 would portend another test of the upside.

Swiss Financial Services

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