Cotton has Record Open Interest Levels

With over 150,000 contracts outstanding and the overwhelming majority of those positions held in the July contract, (see table below), NY cotton prices closed at their lowest levels this year. In other words, pretty much anyone currently long July cotton is losing money. That’s not typically the type of situation that conventionally attracts investors, yet open interest levels indicate that the funds continue to sell cotton adding to profitable shorts.

Although the trend is down, following yesterday’s display of resilience, more than a few cotton traders were anticipating that prices could and would attempt a move back towards 5200 in July. When instead prices opened lower, yesterday’s low of 5040 was soon tested. There was mixed buying around there which absorbed the selling and July prices tried gallantly to hold the early losses in hopes of bouncing back to the plus side as it did yesterday. But when July couldn’t get back above 5070, to no one’s surprise, another wave of selling drove prices down to the 5008 lows made last Wednesday, before another bounce was seen.
That bounce, comprised of short covering and bargain hunters, was helped along with some option related buying. Earlier option trades had been somewhat negative. So this caused the price of July to move above 5040 and 5050, all the way back to 5070, but that was it. Bearish forces returned, both in futures and options, holding things in check. The remainder of the session was a sideways affair, with some weakness attempted, but never really getting started.
Notable option trades included call selling in December, lower strike put buying in July, then some call buying in December. The two sided action in was most obvious in the Dec 60 calls with perhaps over 500 being traded from either side. There were also 300-400 of the Z 64 calls sold. Export sales of 271,700 RB and shipments of 416,200 RB continue to remain strong, but with China out of the picture this week, as they celebrate Labor Day, those numbers may drop off.
It is worth mentioning that there has been a noticeable sentiment of discomfort among a majority of cotton people with regards to their desire to want to hold shorts at these levels. So, that being said, of course spec selling took cotton prices down again today. Specs don’t care much about anything but the look and feel of price movement, and regardless of where prices may seem cheap to some, until proven otherwise these interests will continue to sell and add to their shorts.
* The trend is still down and soon July will begin with a four.
* Bullish chatter: Possible double bottom? Continued good exports
* Bearish chatter: Certificated stocks at record levels. Welcome rain in Texas.
* July Support: (50.28): 50.10, 49.60, and 49.00, 48.75
* July Resistance: (50.28): 50.80, 51.35-51.50, 52.10, 53.15, and 53.70
by Jurgens Bauer
Floor: 212.748.1388
Cell: 973-652-4694

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