Trade Pressure in May Cotton Futures

Cotton futures came under substantial pressure again this morning and conveniently it waited until outcry trading began. March cotton opened weak at 5260 and continued lower as put buying in options only served to add weight along with stop loss selling uncovered below 5275. In options alone, size was bought in both the March 53 and 54 puts and even more in the May 53 puts. Additionally big size was sold in the December 65 calls. Futures meanwhile saw vigorous spread activity as the GSCI roll entered its 2nd day.

Curiously, as I found out last night the Goldman Sachs Commodity Index was sold to S+P. What can this be all about? My own experience suggests that Goldman only sells things when they feel that the price is to their advantage. I remember a story about them giving over the keys of a power plant to satisfy a long term power deal, rather than have to deal with providing regular supply. How will this sale impact the status of this fund and how might it impact the long only fund approach to trading? And further what about the rolling their long positions out of march futures?
The March/May spread has me searching for explanations. Something big feels like it is going on and I cannot see it clearly. Is there a squeeze, and will March soon go premium to May? If there are massive longs that need to be moved out of March and into later months, (ala the long only fund rolling) why isn’t the difference between March and May widening out? That’s what is usually done. In fact, it has been so regular that numerous locals traders have been positioned in a big way for such a move, but it is going the other way. Why?
I don’t pretend to know all the answers, and many will agree that the cotton market has been crazy for a long while now. While it seems that the long term fundamentals portend for an enthusiastic setting and higher prices, (what with lower acreage and ….) “Face it, traditional cotton farmers are likely lining up to rent combines.” There is still way too much cotton left here in the US. …..One way to become higher on everyone’s source list is to lower the price….The cotton pipeline seems plugged with available supply… the loan program holds what 13 mil? Even if prices rally, won’t they then hit a brick wall of selling when it becomes advantageous to take cotton out of the loan? I don’t know.
Then tomorrow brings the all important crop report. Now, I expect that the cotton numbers will again be bearish, (they were last month, but prices recovered as they reacted to the numbers out of corn and beans). I suspect exports will be reduced and ending stocks increased. Yet, I also think it will be important to see what numbers come out in corn and beans again. Will they have another spill over effect?
Look, I’m confused. I have been touting how much I like the back end of the market recently and what has it done? gone down of course. I think cotton still offers great upside potential down the road, but it needs to get through some tough times first. It wouldn’t surprise me to see prices move vigorously between 5100 and 570 in March between now and FND. What that does to May? I don’t know, but I doubt that it too will swing as wildly. Options also expire tomorrow, so hold on to your hat it may be a crazy day!
: March Trend is sideways to lower
5200, 5120-5100 Resistance: 5405, 5445, 5465, 5509-5520, 5570, 5705
In March, the 9 day moving average is 53.76, the 18 day 54.18 and 40 day is at 54.58
In Dec, the 9 day moving average is 59.37, the 18 day is 59.71, and the 40 day 59.61
Crystal ball:
I am becoming increasingly concerned that Dec has been so weak . I still feel that this weakness should be used to acquire long positions and as an option trader, think long calls and call spreads make good sense. Long positions in options offer limited risk. I also am concerned about the long only funds. I attached an article about how one fund manager explained his reason for liquidating. There are huge positions in our market and those longs have prevented the normal course of events from occurring. Cotton prices could easily be 10 cents lower if all of a sudden theywere removed….
The Information and opinions contained herein comes from sources believed to be reliable, but certainly not guaranteed as to accuracy or completeness. No responsibility is assumed with respect to any statement, nor with respect to any expression of opinion herein contained. All views are the opinions of the author at the time of writing and are subject to change without notice. No statement should be construed as an offer to buy or sell a commodity. This publication is for information purposes only.
Jurgens Bauer
trading floor: (212) 748-3898 cell: (973) 652-4694

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