NY cotton futures deflate after wild ride of Mar 26

11 Apr '14

5 min read

The market has felt deflated ever since the wild ride on March 26, during which the spot contract shot up to a high of 97.35 cents/lb before dropping more than 500 points below that level by the end of the session.

From a technical point of view there have been a number of developments alerting us to a trend change lately and the weakness on the chart is likely to take a few more spec longs out of the game in the weeks ahead.

The spot month has once again broken below the uptrend line dating back to late November. This is not the first time that has happened, as the market showed similar weakness in late February and eventually managed to resume its uptrend.

Nevertheless, this time around the breach looks more pronounced, since the market has been making lower highs and lower lows for a couple of weeks now. Further there are several momentum indicators - such as the RSI, MACD and Stochastic - confirming the weak trading action.

However, any spec long liquidation is likely to encounter strong trade support, as there are still 4.1 million bales in unfixed on-call sales on May and July, while merchants have plenty of basis-longs to sell. Last week’s CFTC report showed the trade still 12.1 million bales net short, most of which are tied to current crop futures.

This week the index fund roll has been providing a lot of liquidity for trade shorts to either get out entirely or to roll into July. Based on what open interest is telling us the majority of these shorts has opted for the latter. This harbours certain dangers, since liquidity will dry up considerably after the roll period and unless we see large-scale spec liquidation, these trade shorts may ultimately find it difficult to get out.

While May and July have been stalling, December traded to a new seven-month high today, thereby closing the July/Dec gap to just 945 points. This narrowing of the spread is a reflection of what we are witnessing in the cash market. Mills have been trying everything in their power to limit nearby purchases in order to benefit from cheaper new crop prices down the road.

While that puts pressure on current crop offers, it also leads to pent-up demand later this year, which should act in support of December. Chinese mills for example are much more likely to use their additional import quotas in the third and fourth quarter, when prices are more attractive.

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