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Strong bounce in commodities

06
Jun '08
Cotton found good support overnight as we broke out of the range set on Tuesday, but were unable to hold the gains on the close. We started the day with firm grain prices overnight and a good export sales report showing above average sales with 570k and 270k in shipments (See page 2 in attached PDF).

This was not enough to give cotton a chance to hold the bounce set earlier in the trading session as the buying support from funds has not materialized. Seeing the grains showing their best performance in several weeks would normally have spilled over into cotton but that was not the case. Volume was good with 27,000 futures and 12,000 options as volatility and open interest continue to creep higher.

The fact that cotton cannot break the upside selling resistance is hard to understand after watching an unprecedented move across the markets as they all moved higher in tandem. Stocks and commodities all rose significantly as oil lead the way with a strong rally on the close. Even the dollar held up as cotton continues to trade sideways to lower in an attempt to form a bottom.

We have had a significant number of bearish options recently and the specs tend to be sellers on any rally so the upside potential seems limited short term. The U.S. crop is in line with the 5-year average as we are making the transition from 07/08 fundamentals to the 08/09 harvest projections.

Technically, the MACD is still bearish but the RSI is reaching oversold levelsat 25. The next support lies at 62.90, which was the low created on August 27 last year. Specs and index funds are adding to shorts and we may see the spec position cross into negative territory for the first time in over a year next week.

As demand remains hand to mouth and the trade are more vulnerable after the market spike in March, we may see more bearish options that could trigger new spec sell stops. The technicals are still negative but with such a strong bounce in commodities across the board today, the low established this week may hold up in the short term.

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