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Good volumes in cotton market

21
May '08
Cotton started out the day on a positive note as a fresh monthly high was made when options opened at 7:15 CST. Friendly options and good volume contributed to help cotton break through the long standing resistance at 72.43 that was established on May 1st. The market eventually ran out of steam despite a weak dollar and strong oil prices.

Volume was good today with 32,000 futures and 19,000 options, but eventually grains came off and gave back the gains and then some. Basically, demand has gotten quiet again and planting conditions are friendly this week so it is just hard to sustain much of a rally.

We touched the top of the downtrend line today starting from the peak set on march 4th at 72.70. If this line of resistance holds up, cotton may be forced to trade in a narrow range between 70/72 until we get closer to FND for options.

The strike prices with the highest open interest near the money can be found at 70/75 which will also serve as resistance and support, but the majority of influence will continue to come from the grain markets and how well they do at going higher in the short term. We may continue to trade sideways as positions get squared going into the long weekend.

Cotton needed a rally after failing repeatedly to break through support at 70 cents. However, we are seeing good scale up selling and lack of new money to try and push cotton through the resistance found near 73 cents.

Demand is still hand to mouth andthe board is paying merchants to hold cotton with spreads from N'08 to H'09 as wide as 14 cents! That equates to 175 points a month and is the result of record cert stocks approaching 1.5 million bales and growing.

Volatility has also taken a hit and with July FND approaching, we may see open interest also fall back below 250k. Cotton will most likely trade sideways until options expire.

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