Gains & losses at NY futures this week

10 Apr '10

5 min read

NY futures had a mixed performance this week, as May dropped 290 points to close at 78.60 cents, while December actually gained 38 points to close at 75.48 cents.

Even though speculators committed additional money to the long side earlier in the week, thereby boosting futures open interest all the way up to 201'581 contracts by Tuesday, they failed for a third time to generate the necessary momentum to propel the spot month past the 83.29 closing high of March 1. The reaction to this renewed disappointment was swift, with spec long liquidation taking the market down by over 450 points from Tuesday's high of 83.17.

This latest rejection has not only formed a triple top on the chart, but May's close of 78.60 cents pierced through the lower end of a sideways range that has seen prices meander between 78.70 and 84.60 cents intra-day and between 78.77 and 83.29 cents on a closing basis since February 25. Technical traders will also take note of today's heavy volume of over 50'000 contracts and it won't matter to them that this was primarily due to the "Goldman roll".

Even though scale down trade buying and fixations were visible, they were no match for the massive wave of liquidation by speculators. What happens on days, when sell stops get triggered, is that suddenly thousands of contracts need to get sold at certain chart points and they simply overwhelm any type of buying that may be around. Also, when the market sells off like that, traders often pull their buy orders in the hope of getting even cheaper prices.

The certified stock of currently over 800'000 bales has been the object of much debate lately. Merchants have built up the certified stock to deter the market from going any higher and to reign in the hurtful July/Dec inversion that earlier this week had once again widened out to over 800 points. Even though the bull market in NY futures has been validated by a strong physical market, with C&F Far East prices in the mid to high 80's, the certified stock was probably about 6 or 7 cents overvalued when May was trading near its recent high around 83 cents. This has given the trade confidence to oppose speculators at that level.

However, the certified stock doesn't change the fact that US and world stocks will remain very tight until the end of summer, when new crop will finally bring some relief. According to our latest calculation there remain only around 4.5 million statistical bales for sale in the US, which includes the 0.8 million bales of certified stock. This unsold number may actually be even lower, depending on how much of the 612'000 bales that are sold for August onward shipment are going to be supplied from existing stocks. While at 83 cents the certified stock may have no chance to compete with some of the alternatives that are still available, at 76 cents it would once again turn into a fairly attractive lot of physical supply. The current correction could set the market up for another bullish move behind it, if prices become cheap enough to find a home for certified cotton. If the current certified stock were to disappear, it would become quite difficult to replace it from the limited amount of cotton that remains available.

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