NY cotton futures collapsed

26 Feb '11

5 min read

Such an outlook makes it difficult to forecast cotton prices, because the 'stagnation' or 'depression' component points to lower consumption and hence a bearish price scenario, while the inflation part is telling us that nominal prices of just about everything will go up.

So where do we go from here? Looking simply at the chart, last Friday's key reversal has flipped the switch to short-term 'bearish', with trendline support around 160 cents as the initial target and major support at the 150 level beyond that. However, the cash market paints a more optimistic picture than the futures market. Mills still seem to be in urgent need of cotton for nearby shipment and the basis has strengthened considerably during this selloff in New York. The A-index was still at 215.75 cents this morning and the CC-index at over 209 cents. Also, the Certified Stock of around 220'000 bales has not been relinquished by its owners despite the inversion, which is seen as a sign of strength.

Another friendly indicator is the fact that the inversion persists despite the selloff, with May still commanding an 850 points premium over July. In a bearish market we should see this premium fade away. Speculators are in control of this market at the moment and they may push values even lower over the next few sessions, depending on what happens on the macro front. However, most of the weak longs should be out by now and given the strength of the cash market we expect trade buying to show up at any time. Last week's on-call report still showed 2.3 million bales in unfixed sales on May and 3.7 million bales on July, providing plenty of support. The cash market has been the driving force behind this bull market all season long and it seems to have enough strength left to turn the momentum around again.

Plexus Cotton Limited

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