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Cotton futures dither as As$ gains strength

May '07
There has been only minor changes to Upland cotton offers on the international market over the last week with no real assistance from the futures market. This has led to mills taking a 'wait and see' approach on market direction and further buying.

By this I mean mills are obviously hoping that the market will continue lower in order to buy cheaper cotton and they are holding off from extending commitments until they see further direction. Nonetheless, US cotton has been competitively priced (due to supply) and has been in demand which is a positive sign.

Cotton futures have traded better volume during the week with speculator short covering occurring on moves that test trading day highs. This occurs when futures increase to a level greater than where they were sold and the sold futures position becomes 'out of the money', or at a loss. This causes the position holder to buy back or close out of their sold futures position to reduce the loss.

This in turn can have a snow ball effect that can drive the market higher as these staggered buy back positions are triggered. It is thought that speculators have buy stops at around the 49.25 USc/bu level on July 2007 futures and therefore this level is a target for the bulls to restore some of the technical damage done a few weeks back.

The cotton market is making an effort to move higher, and the 'gap fill' at 49.25 will be an important barrier to reach. From here, the next target will be 50.00. However, without trying to cast another pessimistic slant on this market, the specs have only increased their short (sold) position from 2.7 to 4.4% this week and so it is also feasible for this market to test recent lows as the spec is neither oversold nor immune to selling on any further weakness.

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