USA:Cotton futures rebounds to finish with triple-digit gains

Cotton prices started the week under pressure but after four down days in a row and closing losses totaling over 500 points, cotton futures rebounded to finish with triple-digit gains Tuesday thanks at least in part to sharp advances in other commodities, a weaker dollar and sky rocking crude oil.
Cotton prices stabilized fairly well the middle of the week but clearly got caught up in a huge wave of general speculative selling in all commodities on Thursday when the US dollar demonstrated possible bottoming action for the second consecutive day.
An unnerving "contrary opinion" report early last week had indicated a gross imbalance of bearish sentiment concerning the US dollar. The theory of contrary opinion dictates that once everyone becomes bullish or everyone bearish as in this case, look out.
The report indicated far too many traders on the same side of the boat. Readers might remember that cotton registered a 90 percent bullish reading on March 3rd, right before the crash. Readings are never more bullish than at the top or bearish at the bottom.
Additionally, widespread publicity the last week or so on food shortages and rationing of rice at major discount stores helped put the "kiss of death" on the bull run on many commodities at least for this week. Those type stories, once they hit the cable news networks or national publications, often attract low quality, "Johnny-come-lately" buyers who are invariably under financed and very vulnerable.
As has happened so often, when they started to lighten, reduce or get out of positions, the door was too small. Case in point, the day the discount club announced their rationing of rice, rice futures went limit down.
Low exports and another depressing domestic consumption report did not help the bull case but still were not the primary reason for lower prices Thursday (Such as technical deterioration, the general meltdown in CRB and follow-through strength in the dollar).

Cotton prices rallied on Friday when grains rallied but unfortunately cotton could not stand on its own feet and when grain prices rolled over, cotton prices came down hard. More technical damage was also done to cotton when the market made new lows for the week.
May cotton lost 242 points for the week while July finished 316 lower. December cotton lost 284 points for the week. Friday, May settled 1,049 points below the highs just eight sessions earlier, July 1,079 points and December 945 points.
With the May contract nearly liquidated, traders now get ready for the July contract to bear the weight of the burdensome carryover – unless of course, serious crop problems start to show up.
On the surface, the weekly spec/hedge report looked unchanged from the previous week. However, closer inspection showed liquidation in all four of the four major categories – spec long, spec short, long hedges and short hedges.
Interestingly, the report also indicated that the spec long position has fallen below 100,000 contracts for the first time in nearly eight months. Since the spec longs set the record they have liquidated about 40% of their position. Through last Thursday, total open interest just since the market topped the first week of March has fallen over 51,000 contracts.
The perceived shelf of fundamental support from fixations and fresh export off take between 74 and 71 cents in July has been severely tested and so far has provided insufficient support. The spiked-blow off reversals so ominously evident on the monthly, weekly and daily charts kept prices on the defensive last week and was exacerbated with the reversal in the US dollar.
Unfortunately, the bearish seasonal pattern that has weighed on the July contract the last ten days will be with us for at least one more week. July cotton has had this prevalent pattern 13 of the last 15 years in the three week period between the middle of April to the end of the first week of May. However, December's seasonal tendency to gain on the July contract should give that month some relative stability.
Technically, bears are gaining momentum as the short term moving averages (7-10 day) are crossing beneath the key intermediate moving averages (20-21 day). There is not much support beneath the July contract for about three cents if the 71-70 cent area fails to hold.
It should be noted though, that quite often, extreme closes such as seen Friday is more indicative of towels being thrown in for the weekend than any thing else. It would not be totally surprising to see cotton open higher Monday particularly if other commodities do so. However, July needs to close back above 7300 and December 8125 to indicate "possible" bottoming action.