Cotton prices in NY dropped sharply today encouraged by exploratory spec selling, some profit taking and some early bearish option strategies. What was most interesting is that prices seemed as though they would open steady, which is how things looked late during the pre-opening. So when July opened trading from unchanged 5270 to 5260, down 10, many expected December to follow suit.
Of course, since Dec had settled a bit higher than the switch had been running, a little further weakness in Dec could only be expected. However once the December contract opened, it immediately traded from 5850 down to 5810, with the weakness heavier than expected.
The situation was exacerbated on the re-open when Dec failed to hold its head above 5800 and July found sell stops beginning beneath 5250. Locals scrambled and new selling joined the fray with a series of bearish option strategies being implemented. Soon July was down trading at 5150 support again and December as low as 5725. Both then experienced a bounce, first from short covering, but also noticeably from some friendly option strategies, as some puts were now being sold. There may have been some bargain hunters too taking advantage of the price dip. Regardless, July made it back to 5225 and December 5800, before prices found some stability and began to move sideways. December then traded between 5755 and 5785.
The July/Dec spread, which had settled wide, opened trading at 560 and widened out on the drop to 570 and then 590, before it came in. And when it did narrow, it did so quickly. Seems that local traders dumped their long Dec/short July, when the buying in the spread cooled. Their actions helped July/Dec move back in to 565, before finding some solid interest again. That spread went out trading 564/565 and 562 as a switch, although settling 579.
As I had mentioned yesterday, it appeared as if prices might be in for a retest of underlying support. Tonight, I wonder if the support found was adequate. I think not. Cotton seems to behave abhorrently when it attempts to respond in a bullish manner. Why, it has no manners at all! Some on the floor have declared,” Cotton is the worst bull market one can find on this floor.”
Among the volume in options, were another sizable purchase of October 65 calls. Many heads are spinning as to what’s in store for the relationship between July and Dec and it may soon stand to narrow appreciably, once the index funds are finished rolling longs. Have the July shorts rolled?
December should find support from the weather problems and as it approaches the gap between 5669 and 5996. But a close below 5600 could look ugly. Technically, July has had three trips now over 5340 and couldn’t break through. It has also been able to find support thus far at 5150. Therefore, look for July to trade between 5150 and 5350, but follow any breakout. There has been a sharp difference of opinion regarding the presence of a strong stopper for the July. Although this situation may change, and I had been suggesting that with differences so wide and open interest levels so high in July, it certainly doesn’t look like there is a strong stopper lurking today. If you have any thoughts or comments, let me know.
We at PICO wish you success in your trading, Jurgens.
Jurgens Bauer, Jurgens@gmail.com
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