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Cotton market in a tailspin, need some good sales support

09
Sep '08
Cotton remains entrenched in the downside trend channel which has been in place ever since we broke the long term uptrend in March (see page 2 in attached PDF). Crop progress reports are similar to last week, but we continue to get wet cooler weather on the east coast as well as Lubbock.

The crop at this point needs to dry out and give one more run at higher temps and we should have a bigger crop than the USDA is predicting. They come out Friday with their August estimates which should be better than what we had in July of 13.77 million bales. Volume was above average with 17,000 futures and 13,000 options as cotton open interest remains at the lows of the season.

Spec hedge report today shows the specs reducing their long position from last week of 3.6% to .7% long. This is a typical reversal of new longs in the previous week as Z'08 took a big hit last week on spec sell stops. We are stuck in the current bearish commodity pattern where energy prices are sliding and the dollar is gaining upside momentum from the weak Euro.

This pattern may be in place for the balance of the year until we see an adjustment of money from funds move into the market next year. In the meantime, cotton is looking oversold with an RSI of 30% and we are seeing good sales and inquiry at these levels.

Looking at page 2, we are bumping into long term support levels which is where this market took off from late last year and peaked in March'08. We are getting some good fundamental support, but the technicals have turned negative and after today, we are crossing lower on the MACD.

Considering the low open interest in cotton and the holiday mood from Ramadan, cotton is in a tailspin and will need some good sales or spec support in order to rebound. We continue to test the lows with a major support level at 65.30. This will depend on outside markets, but a short term bottom may be in place near the 65 cent low today.

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