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Plexus cotton market report

03
Jul '09
NY futures rebounded this week, with December rallying 343 points to close at 60.92 cents.

The old adage that tells us "to never short a dull market" proved once again very valid this week. Until Tuesday the cotton market had been rather subdued, with daily trading volume dropping to only 3'430 contracts on Monday and open interest falling to as low as 105'969 contracts last week.

But just as we were about to ring out the first half of the year, the cotton market suddenly sprang back to life and rallied nearly five cents between mid-session Tuesday and the end of today. The fact that volume has been picking up and open interest is rising provides some credibility to this move.

A rumor late Tuesday had it that large sums of new money were about to be placed into index fund products by new investors and that was enough to get things going in this thinly traded market. Judging by the jump in open interest yesterday (+ 3'140 contracts) it is quite conceivable that some new index or hedge fund positions were established at the start of the new quarter.

Whether the rally proves to be a flash in the pan or whether it is something more sustainable remains to be seen, but at least for now the negative readings on the chart have been flipped around and the market is suddenly showing some vigor, challenging key resistance points that are within 2 cents above today's close.

When we look at the daily chart of the most active month, December, we have as the next upside targets the 61.22 high of June 15th, followed by the June 2nd closing high of 62.63 and the May 11th closing high of 62.86 cents. Beyond that we have to go all the way back to October 2008 to find a higher close in December. When we look at the weekly chart, for which October is the relevant month, we are even closer to resistance. October closed today at 59.00 cents and the next higher weekly close is at 59.85 cents (week of May 8th). If this resistance point is taken out, we have to go all the way back to September 2008 to find a better weekly reading.

The big question is whether speculators, who have abandoned our market in recent months, will come back to sponsor new long positions and push values through this layer of resistance. From a specs point of view the cotton market may present itself as an interesting play, because the trade is already short futures against old crop supplies and has no justification to add to these shorts until new crop becomes available.

It may therefore not take a huge effort by new longs to get the market through resistance, trigger buy stops and send the trade scrambling for coverage. As we have learned in the past, in-between notice periods it is possible for the market to take on the role of a casino, where money matters more than reason.

From a commonsensical point of view the current price level seems too high, as it did on the previous occasions we traded up here. Mills have not raised their price ideas and there are still plenty of supplies available to satisfy demand until new crop arrives in about 3 or 4 months from now. Speaking of new crop, the major producing areas are apparently doing quite well. Informa, a private forecaster, is putting the US crop at 14.02 million bales, which would be 0.77 million bales above the current USDA estimate. In India the monsoon seems to be catching up and China's growing regions are reporting relatively good growing conditions.


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