Cotton Traders Analysis
by Jurgens H. Bauer

Cotton Traders Analysis Archives

April 10, 2006

“USDA’s Supply/Demand Report viewed as friendly, yet price action doesn’t concur.”

Although not containing any real surprises, this morning’s USDA supply/demand report showed increases in production and consumption, with ending stocks slightly lower. This news was thought of as being a bit encouraging for bulls and perhaps sufficient enough to make bears more nervous, especially on the heels of Friday’s gains. So when prices of NY cotton futures opened higher, expectations were that prices would test recent highs and give it a shot at rallying further. This of course was preliminary and based upon anticipated speculative short covering.

Yet, this was not to be as the initial wave of expected spec short covering didn’t have impact beyond fueling May to trade 5445, or only slightly above Friday’s high. A test of support at 5390-5400 eventually followed and when that gave way prices retreated. It almost appeared as if those that bought May above 5400, sold it when it traded below 5380. Kind of like traders are eager to pounce on an opportunity for prices to stage a run up, but disappointed when it didn’t materialize. This prompted selling.

This selling gained momentum as May broke 5370 and light stops were triggered between there and 5350, helping May establish an early low price of 5325. From there a minor bounce occurred, but nothing significant. Then trading in the May (K)/July (N) spread took president.

May July spreads were actively traded and will be for the remainder of the week. A featured index fund began rolling its positions on Friday and typically allows a few days to complete their roll. As a result the May (K)/July (N) spread traded at 170/165 on the re-opening then made it as high as 175 before backing off to 167. From there it widened steadily back out above 170, trading volume at each tick beyond 174. The high was 179 and the closing range 177-179. Estimated volume was well over 7,500 contracts in the switch.

Expect the feature to remain on the May/July differences and regardless of the large amount of longs slated to be rolled. Note also that there seems to be interest in helping that roll take place above 175. At least some key members of the trade appear in earnest as being prepared to sell the spread as it moves out above that level. Does this mean the spread has topped out? Perhaps, as it does appear as if once these longs are done, the spread may narrow in. However, if there is a strong stopper of the May contract they certainly haven’t made there desire know as of yet.

Remember this is a shortened week with options expiring on Thursday.

• May Support: (5320): 5375? 5357-5340, 5315, 5302, 5205-5189, 5170-5160, and 5125-5108.
• May Resistance: (5320): 5410-5425, 5470-5480, 5510, 5545-5570, 5605-5615, 5635-5645, 5732-5750, 5810, and 5860.

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Our Comment:

When good news comes but prices doesn't move up, it means that the price will go down in the next a few days.