NY Cotton futures traded an estimated 53,000 contracts today, which should establish a new record. Much of the volume was directed at spreads as positions got moved out of July and into other months. Estimated volume in the July/Oct spread alone was thought to be between 8,000 and 8,500, with the greater part changing hands on the close. Look for open interest to jump substantially in Oct as a result, maybe even triple.
Trading in the Dec/March spread was estimated at over 3,000 and the popular July/Dec, which widened out from 500 to 549 (principally the result of the sell off in July), was thought to have traded 4,000. All told, that means that over half of today’s volume record was the result of spread trading.
While there was a great deal of focus upon spreads, trading in out rights months served to help widen the differences between July and the other months. As July opened lower, specs were thought to have been buying July. This early buying in July encouraged efforts to get July through unchanged and into the plus column, but the effort failed. First July ran into some producer selling then specs turned sellers. July traded down to 5120 and back to 5150, even reaching as high as 5160 again, but when it broke 5120, locals covered some longs which helped July move down to test support between 5115 and 5095. When 5090 gave way, light stops were elected, but there was no buying causing July to swiftly drop to a low of 5050.
July attempted to recover from this move down, but never really managed to do so. The effect on the spreads was that July/Dec widened out to 549. December did manage to recover, as it closed down only 11 points on the day. On charts, the price action seen in December still lends itself to any move above 5680 as having the potential to fill a small gap between 5790 and 5800. Such a move would also bring some of the longer moving averages into play, so that any such action might bring a great deal of attention to December. I expect open interest in December to break all kinds of records before years end.
I kind of favor the long side in December and will favor it even more if it can trade above 5700, especially on a close. The price action provided by December seemed resilient today, in its ability to recover nicely from the lows. The July contract however is another story and the spreading that will continue as positions get rolled will show that spread to be potentially volatile. There are a lot of positions that will need to be shifted and depending upon which side is rolling we could see major movement in July/Dec occur from either side. I also find it interesting that July/Oct saw so much action, since October is considered to be a “bastard” month. Yet, remembering back to last year, I kind of think a few funds did roll at month’s end out of July and into Oct.
At any rate, look for spreads to continue to receive much action. The result will be volatile differences and its being speculated that July/Dec may widen out to 600 or more. The Dec/March should widen too, but once July/Dec comes in, as it will on occasion, look for a similar narrowing to take place in the Dec/March. When that happens, it probably makes sense to use that opportunity to buy March and sell Dec, since that spread is expected to widen out due to penalties.
I need to get this report out, so I’ll close tonight by suggesting that if you’d like to ask questions, feel free to give us a call.
Jurgens Bauer, Jurgens@gmail.com
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