Contrary to the price action seen in other commodities today, NY cotton staged a conspicuous rally by moving all the way back up to 5320 in early dealings. This move may serve to confirm suspicions that cotton prices are situated in a sideways trading range between 5188 and 5426 over the near term. Only a break outside of those numbers will provide a change in that appearance. It wouldn’t be a shock to see sizable stops placed in abundance near those numbers. So, treat those levels accordingly.
Today’s action occurred after Dec opened unchanged to slightly higher. Then December cotton futures slid back to test the downside on the re-opening, getting as low as 5202. Many traders had anticipated early weakness for it appeared on Friday that cotton prices had resumed their downtrend, closing soft and within shooting distance of 5188, (an area of key technical support). Also, with lower prices occurring in other commodity markets, local traders were anticipated a negative showing. Yet, when there was no follow through, locals covered and buying above 5240 became evident.
There was some spec buying and a fund was seen doing some buying, which only served to stimulate additional buying from locals as they covered shorts and got long. Another feature was the lack of aggressive selling from spec funds. The combination of the two helped uncover some stops above 5240 and fuel additional strength. Dec climbed steadily, culminating in a move above 5300 where locals took profits as some trade selling was found. This caused the price of December to ease back below 5300 and signaled the beginning of the now infamous sideways waltz with Dec trading between 5300 and 5275. Dec spent the remainder of the session trading between these two points.
Options transactions included the early purchase of bearish 3-ways involving the purchase of Dec 52/46 put spreads and the sale of Dec 56 calls, also some Dec 50/46 puts spreads bought outright. These took place early and before prices firmed. Then some Dec 50 calls were bought from 428-450. Later 100 Dec 53 straddles were sold at 620, 100 or so May 49 puts sold got sold at 150 and late 200 of the Z 52 puts were bought.
I heard no news regarding today’s upward price move. I suggest that it is only validating that cotton prices are camped in a range. On the one hand, there seems to be no urgent demand apparent, suggesting near term supplies are adequate. And the supply side is thought to be in jeopardy of continued dry weather in Texas, but time is needed to see how that develops. There is little new news regarding the status of the world crop. However, there is a great deal of uncertainty in the world, the Middle East situation is growing increasingly tense which can only serve to make investors nervous and jittery.
Technically, look for sellers to re-emerge on strength, but be mindful of the 5188 and 5425 areas. How prices respond to December price moves towards those areas will speak volumes. Perhaps it is a good idea to remain on the sidelines during this time, or at least until a clearer picture becomes apparent. I still find it hard to sell cotton short at these levels with the crop potentially under stress. Options might offer a play.
My colleagues and I at PICO would enjoy discussing the market with you. We’re always available and seek to build relationships in the hopes of doing business. If you have any strong views on where you feel cotton prices are headed, why not give us a call.
Jurgens Bauer, Jurgens@gmail.com
Floor: 212.748.1388, Cell: 973.652.4694, Fax: 212.742.5284