Cotton prices continued to be trapped within the approximate 4 cent trading range established way back on May 1st. Without much in the news background to stimulate trading other than welcome rains in West Texas more than offsetting planting delays in Mississippi, prices tried the downside this week with no more success than previous attempts.
The spot month, dipped below 70 cents for the seventh time this month on Thursday and predictably – just as the first six times, found commercial buying waiting. Prices stayed well inside its three-week ranges Thursday but the lows were the lowest in seven sessions even though prices came back a bit for the close.
Friday was another matter. With the downside shown to have little potential, cotton traders took note of soaring gold, crude oil and grains along with weakness in the US dollar.
Prices began to edge higher in early trading with a slow careful rise at first but when key technical indicators were tripped, cotton prices exploded for two cents in a matter of minutes. As pointed out on the Ag Market Network last week, the markets vulnerability seems to be to the upside regardless of the bearish fundamentals.
By mid morning Friday prices were at their best levels since May 1st. Cotton prices held steady for the balance of the session and closed on a very firm note. While bullish options strategies help propel cotton prices Friday, it was also option related selling that prevented July from making new highs for the month.
No doubt some of Friday strength came from spec and hedge fund short covering. Last weeks spec/hedge report indicated over 5,000 new speculative shorts had entered the market the week ending Friday May 9th.
Their short covering helped fuel Fridays rally when the previous weeks highs were violated. It was their buy stops that were elected. For the week , July cotton gained 41 points and Dec 42 points.
West Texas received scattered precip several days last week with more widespread, beneficial rains on Wednesday. However, at this point, fundamental snippets such as that seem to make little difference to index fund traders any more than the bulging certificated stock or continued sluggish export shipments.
Commodities as an asset class will continue to be part of the index funds investment portfolio for the foreseeable future and cotton simply has its assigned weight in an index.
Last week's Ag Market Network conference call pointed out that commercial buying in the form of mill fixations and fresh export off take seems to come of of the woodwork when the spot month dips between 7050 and 6950. That pattern continued last week.
The conference call, while conceding that a break below the lows of May 1 would be disastrous to the bull argument, also reminded listeners that that did not seem to be in the cards right now and that the risk for the next few weeks was to the upside.
As mentioned in last weeks letter, technical indicators while consolidating within the May 1 range, indicate base building. Friday's impressive close was above the 9, 20 and 21 day moving averages for the first time since the middle of April.
From a technical perspective, this should portend a highly probable test of the May 1 high of 7243 very early Monday. Also at risk is the downtrend line off the March-April highs and above which significant buy stops will likely be found.
