Rather than committing to an outright position, traders prefer to work from a basis long position and maybe apply some options strategies to provide upside potential in case of a breakout. But the trade is currently not a driving force on the long side, although it has been a net buyer of futures against physical business.
When we look at the activity of speculators in recent weeks, there has been a clear move to reduce long positions due to what transpired in the credit markets. Last week alone, spec longs cut their position by 15'283 contracts, while spec shorts were surprisingly inactive as they reduced their short exposure by 900 contracts.
Typically a breakdown in the technical picture like we have seen last week would invite short sellers, but it seems that many traders were either in a state of paralysis or had other priorities
Thanks to the Fed intervention late last week, financial markets have calmed down for the time being and volatility has dropped back from extreme levels. This has given traders a chance to regroup and the selling pressure that has spilled over into commodity markets has subsided. Nevertheless, last week's breakdown has left its marks on the chart and it will take awhile before these specs return as buyers.
In the near term the cotton market will probably continue to drift sideways, albeit with an upward bias. From a technical point of view this is supportive, because it allows the market to build a basefrom which it may eventually move higher.
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