USA:Cotton market stabilizes after a wild week

The more things change the more they stay the same. After one of the craziest weeks in cotton prices since the Civil War, the spot month has returned to the previous trading range after a wild week of limit moves up and down. The synthetic close today was 100 pts lower @ 76.25 which could lead to more weakness tomorrow as N’08 also settled lower than the limit at 78.56.
The spreads have started to widen significantly as the Z'08 is not as weak and we are looking at well over 100 pts a month to carry the cotton out till December. It looks like the trade shorts are still licking their wounds from earlier this week but have no intention of buying back K'08 shorts and will be happy to deliver cotton to the board instead.
Volume has come back to normal with only 25,000 futures and 60,000 options as we began the week almost in the same trading range as the week before with only a spike on the chart to remind us of the rally.
An article Friday in the Wall Street Journal expressed how some hedge funds have been under pressure to reduce positions recently as lenders are being squeezed by the growing problems in the home equity market and rising foreclosures.
This rumor is reinforced by the recent behavior in soft commodities including cotton, sugar and coffee which are now down 15% from the inflated highs. There seems to be a profit taking mentality in the commodity complex which is adding to the nearby weakness and may continue this week as thespec long position fell to 18.3% from 22.7% last week.

Volatility has returned to normal as open interest continues to fall and cert stocks have grown over 700k with 620k in stock and 90k awaiting review. We expect a bearish to neutral USDA S&D report tomorrow.
Technically, we have an island reversal on the chart where many of the panic short covering longs are stranded with today’s gap above the market. The next downside target in K’08 would be a small gap we made on the rally up between 75.20 and 75.12. Attached a chart of the volatile Z’08 contract on page 2 to give our ideas of some possible scenarios on this short term correction.
Nearby looks like we will continue to test the downside as stocks closed very weak today and there seems to be a lack of hedge fund demand.