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Cotton sees quiet trading session - Jul 10

Jul '07
Market was trading lower electronically and eventually opened 30 pts higher. The market failed to find buy stops and eventually fell back to a low of 66.07 but found support under 66.20 and eventually closed higher. Volume was average today with 21,000 futures and 22,000 combined options as well.

After yesterday's record option activity of 70,000 contracts, today was a quiet trading session. Spec hedge report reached 30% today compared to 28.7% last week. However, the spec position has only risen 3% in the last two weeks even though the market has come up almost 600 pts.

This confirms that the majority of buying at the moment is coming from the trade who are rolling up their short positions and putting on new long option positions to take advantage of the rally.

Looking forward to the USDA report coming out on Thursday, we are expecting a cut in U.S. production after the big loss in acreage at the end of June. This should cut the crop at least 1 million bales down from 18.8 to 17.6. However, it will be offset by a reduction in exports and the total change in U.S. 07/08 ending stocks may not be as severe (500K reduction max).

This information is already in the market and there is still a good chance that there could be an increase in Chinese production (1-2 million bales max) which has been expected that could cancel out the cut in U.S. production and leave world ending stocks unchanged to higher.

Technically the market has broken out of the three year trading range and it is looking like the market wants to test 70 cents based Z'07. Fundamentally, it will be very difficult to find demand at these levels except for those who have no choice.

This is mainly driven by the current tightness between crops, and we will have to wait until the specs finally run out of ammunition. However, there are plenty of gaps that have been made on this 15 cent rally and the RSI is showing over 84 today which is way overbought.

A new flag has started on the daily chart and will have to wait to see which way it breaks.

Click here to view graphical presentation:


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