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NY cotton futures show mixed performance this week

25 Jan '14
5 min read

So where do we go from here? Based on the above analysis there is certainly a chance that the market is going to follow in last year’s footsteps and the short squeeze continues. However, the market will not go up in a straight line and there are going to be periods of consolidation.

Conflicting news stories like the ones from China earlier this week and momentum indicators signaling ‘overbought’ conditions may prompt some specs to take profits, but unless the majority of specs gets spooked out of their long positions, trade shorts may have a rough road ahead. Adding more on-call sales week after week certainly isn’t helping their cause!

What complicates matters for the trade is the huge 800-point gap that exists between current and new crop. Last year at this time we still had flat board all the way to the December contract, which made it conceivable to roll a short position from current to new crop, while today’s 800-point cliff is simply prohibitive.

If this huge gap between July and December persists, it will create a sense of urgency among merchants and growers to dispose of existing long positions before prices roll over to December. The unwinding of market and basis-long positions could take a toll on the basis, as physical prices come under pressure, while NY futures find support from short covering.

As expected, new crop prices continued to divorce themselves from current crop, as strong resistance emerged from hedge selling once December approached the 80 cents level. This trend is not likely to reverse as long as the current market forces (short covering in current crop versus hedge selling in new crop) persist.

Plexus

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