NY futures remain under pressure this week

17 Jul '10

5 min read

Although the numbers may be a bit distorted due to the July liquidation, they tell us that the trade increased its net futures and options short by 3.0 million bales to 11.7 million bales between June 8 and June 22, while speculators and index funds went net long by the same amount. This happened with prices hovering just below 80 cents. However, at the end of June renewed concerns about the economy prompted hedge funds to cut their commodity holdings. This resulted in speculators and index funds selling 1.9 million bales net between June 22 and July 6, while the trade used this downturn to reduce its net short position by as many bales.

So where do we go from here? The market is clearly lacking momentum at the moment. On Tuesday, when the market rallied 86 points, open interest dropped by 2'904 contracts. Then on Wednesday the market sold off 130 points and open interest dropped by 588 contracts. On both days volume of around 12'000 to 13'000 contracts was lackluster and it dropped even lower to just 9'000 contracts.

In order to have a sustained move either up or down we need to see increasing volume as well as a rise in open interest and we are not getting that right now. From a technical perspective the market is in a short-term downtrend, which combined with jittery outside markets probably means that speculators won't throw money at the long side anytime soon. On the other hand, speculators were only 2.7 million bales net long on July 6 and we don't expect them to go net short either.

Based on a bullish fundamental outlook the trade has been buying some of its short futures back at these lower levels, possibly tied to mill buying or merchants going outright long by lifting legs on basis-long positions. The trade will likely continue to be a scale down buyer, which should keep potential spec selling in check. However, if the market were to rally back into the high 70s, the trade would probably become a net seller again and thereby keep any potential advance contained. We therefore see the market range-bound in the foreseeable future, as it will take some force to generate a sustained move and this kind of momentum is nowhere to be seen at this point.

Plexus Cotton Limited

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