Feb '10
The market is now firmly back in the grip of the bulls after the spot month has rallied more than 1000 points in a matter of just eight sessions. While cotton fundamentals have been friendly for quite some time, the technical picture has now aligned itself in that direction as well. Momentum is bullish, short- and long-term moving averages are all pointing higher and daily, weekly and monthly charts are displaying strong reversal patterns after the recent sell-off. When looking at a candlestick chart, which illustrates the balance of power between buyers and sellers, we notice eight consecutive white candles, indicating that the market has closed higher than it opened for the last eight sessions. In other words, the buyers have a strong upper hand at the moment and that is not likely to change anytime soon.
Last week we tried to explain the current 'imbalance' that exists between buyers and sellers. Although there are of course always an equal number of longs and shorts open at any given moment, the timing of when these positions become active, either by liquidating, increasing or rolling out, becomes an important part of the analysis. To quickly recap the situation we are in right now, we basically have a big block of index fund net longs opposing a large block of trade net shorts, with relatively little spec participation outside of that.
Index funds have strict rules as to how and when existing positions will be rolled forward. In general the May position will be rolled into July at the end of March/early April and the July position will be rolled into December at the end of May/early June. In between these rolling periods the index fund net long position remains relatively inactive.
Therefore, if trade shorts decided to go square, they would either have to wait until one of these rolling periods provides enough liquidity or else they need to find someone to take the other side. Another problem is that there are not many potential new shorts out there at the moment, since the trade will be a strong net buyer of futures itself until the middle of June (July expiration) and speculators are more interested in joining this bullish trend than betting against it. In short, we have a lot more traders interested in buying the market than vice versa, be it to close out basis-long positions that are being sold to mills, be it to offset mill fixations against which futures have previously been shorted or be it to establish new spec long positions.
What we have right now is a very tight fundamental situation in current crop, which will have no remedy until October/November, when the next Northern Hemisphere crop will bring relief. However, in terms of the futures market, all of the action regarding current crop will be condensed into the next four months, because by the middle of June all of the futures, options and unfixed on-call positions related to March, May and July will have to be dealt with.
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