We are starting to find some stability after three straight locked up limit days of trading. Overnight activity opened lower but soon found good scale down buying and eventually worked cotton prices back to limit up in the early morning as we even traded synthetically above 100.00 in the Z'08.
The panic was not as bad today as the trade did not have enormous margin calls to digest. The market eventually worked its way back to unchanged and even 100 lower before bouncing back slightly on the close.
There seems to be good fund and trade buying with the spot month under 90 cents. Volume came down to a somewhat normal level with 62,000 futures, 23,000 calls and 43,000 puts as we continue to see some good psychological resistance near dollar cotton in the back months.
Export sales tomorrow should be below average again as overbought signals are really starting to build up with volatility starting to weaken, open interest falling, cert stocks growing and the relative strength index hitting record levels in the mid 80’s. Many investors are expecting some consolidation at these prices but are willing to continue buying dips.
For that reason, we may see some downside testing, but hard to see any big pull back as there is plenty of hand to mouth buying from mills including trade and hedge buying to keep the market in check.
The U.S. dollar continues to weaken and the strong upside momentum in energy, metals and grains are pulling the forgotten soft commodities (cotton, coffee, cocoa and sugar) into the game which has been going on now for 5 years.
The stock market continues to struggle with fears of recession and inflation as commodities are the new hot and sexy investment opportunity. With open interest still at 300,000 contracts, the hedge funds have hijacked the physical cotton crop. After forcing the commercials to reduce short positions, it will be hard to find any sellers as new money continues to enter the market.
Technicals are in new territory as 400 point limits still apply, but the momentum seems to be under pressure after a 25 cent rally over the last 15 sessions!
