NY futures moved higher this week, with December gaining 135 points to close at 60.42 cents and December'08 advancing 125 points to close at 69.15 cents.
The market followed through on last week's improving technical picture, as heavy spec and options related trade buying propelled values nearly up the limit last Friday. But since these higher prices led to a slowdown in export activity, the market was unable to sustain the upward momentum and as a result we have seen values back off again over the last couple of sessions.
After substantially reducing their net long position in recent weeks, spec funds came back into the market last week by adding 6'508 new longs, while spec shorts added just 98 contracts. This resulted in an increase of the spec net long position to 4.51 mio bales or 22.2% of open interest. The trade on the other hand liquidated 1'569 longs and added 4'841 new shorts.
The pattern we have seen emerging in the cotton market over the last four months has seen hedge and index funds lead the charge by committing large amounts of capital to the long side, based on either a bullish macroeconomic outlook or an improving technical picture, producing enough momentum to force an extended move to the upside.
However, without the cash market following the advance, these rallies run quickly out of steam, which is what happened on the run up to 68 cents and which seems to be the case again in this latest breakout attempt.
In order for the market to have a sustainable rally, both speculators and the trade will have to 'buy' into the bullish story. While there are certainly reasons to build a bullish case from a fundamental point of view, such as the out of kilter price relationship between cotton and grains, the statistical supply gap and the weakening US dollar, it is also a matter of timing.
marketing@alchempro.com
