Cotton Traders Analysis
by Jurgens H. Bauer

Cotton Traders Analysis Archives

March 23, 2006

“What goes down must come up…Well, at least for a breather now and then anyway…”

NY Cotton prices managed to gain back most of yesterday’s losses, helped at least in part by another round of positive export numbers. Opening volume was spiced with more of the same aggressive spec and fund selling early with the trade again seen buying. This time, however, due in part to the strong export sales numbers, prices actually advanced somewhat after first opening unchanged and testing support at 5200 in the active May contract. There was a dispute, resolved by the floor committee, regarding the early low which was subsequently raised indicating unsatisfied bids.

From there May tried on several occasions to rally, making it above 5250 and uncovering some light buy stops. That action may have helped May to reach an early high price of 5285, which was actually tested two or three times, but each time it seemed more a result of the selling drying up rather than outside buying. All this serves to lead one to believe that once again further cash business may have been stimulated as a result of yesterday’s price decline.

Option activity also was a factor, with early action predominantly bearish and volatility levels climbing with the first few trades. Again there was size, (850) N 53 puts bought early. These were traded by two separate brokers and seemed headed for separate accounts, at least one of them a merchant, while another merchant bought 150 of the N 54’s and spread another 100 against selling the K 52’s. Other action in N included some bearish fences and some outright 58 calls that were sold for 105. There were however, 200 K 54 puts sold early too.

In December options, 400-500 of the Z 56 puts got bought against the sale of 400-500 N 55puts. These trades took place between 30 and 40 points. Also in Dec 100 Z 58/68 call spreads were bought for 285, 100 Z 48p/75c strangles got sold for 123, and 200 Z 51 puts were sold for between 150 and 152. Most of the option volume occurred early, however mid day a spec bought 200 N 60 calls for 80. Later trades included the purchase of perhaps up to 500 of the K 50 puts for 30, thought to be short covering, and some selling of N 58 and K 54 calls.

The big question on everyone’s mind right now is whether this recent action indicates that cotton prices are approaching a bottom. The answer will certainly be revealed in due course, but allow me to suggest that corrections are expected during trends, if only to reaffirm the validity of the trend. The current trend in cotton is down and that won’t appear to change until a close occurs above 5435 in May. However, it is worthy to note that there really wasn’t much short covering witnessed during today’s session. So, with open interest indicating this morning that there are a lot of new shorts now in cotton it’s possible that a serious bout of short covering may still be due. Could such an event happen tomorrow? Sure.

The May (K)/ July (N) spread was active and curiously continued to widen out from 140 to 148. This is true of other spreads as well.

May Support: (5225): 5225-5240, 5200-5160, 5115-5108, and 5050

May Resistance: (5225): 5340, 5385-5410, 5470-5480, 5510, 5545-5570, 5605-5615, 5635-5645, 5732-5750, 5810, and 5860.

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