We had a good week of consolidation in cotton as we had a high in K'08 on Monday of 72.97 and the low of the week on Tuesday at 67.31. The rest of the week was spent in the middle of the range near 70 cents.
Demand was good at the beginning of the week as China was a big buyer, but China had a holiday on Friday and the demand dried up. The main feature of the week was rolling from May'08 forward at the popular difference of 350 pts.
There can be an argument that this level is sufficient to cover carrying costs and penalties to July, but after the volatility in March, some of the holders of cert cotton willing to deliver on the K’08 may need a wider spread to hold on to their cotton. Volume was light again today with 19,000 futures and 9,000 options as we continue to trade in a narrow range.
The stock market was neutral today even after a very negative jobs report where the unemployment rate jumped from 4.8% to 5.1%. The dollar ran into some weakness, but for the week, we had a good rally in the equity markets (+4%) and commodities started to form a bottom. We will have to see how the market responds to the USDA S&D reports on Wednesday, but we are not expecting any bullish numbers for cotton.
Also, looking at the commitment of traders report today, the non-commercial index funds continue to reduce longs and add shorts to their cotton positions as open interest has fallen to 266,000 contracts today. Options expiration on Friday should keep the market bound to a tight range next week between 70/71 cents.
Technically, we are starting to create a flag pattern with this sideways consolidation, but there is no reason to believe the downside testing is over. We still have the sell signal from the crossing moving averages and cotton broke the long term trend line in K’08. Cotton offers have switched to N’08 and the large index funds will start rolling next week.
We could continue to trade sideways short term, but based on the growing cert stocks and neutral grain prices, we don’t feel there is a lot of upside potential and K’08 may run out of support after options expire.
