Credit Crunch Crushes Fundamentals in Cotton!
After last Thursday’s limit-down move on heavy speculative liquidation, Cotton futures have staged a moderate comeback, with prices nearly 350 points above Thursday’s lows of 5560. Yesterday’s weekly USDA crop progress report showed that the U.S. Cotton crop continued to deteriorate, with 51% of the crop now rated good-to-excellent, down from 53% last week and below the 10-year average of 52%. The recent sell-off in Cotton prices may make U.S. Cotton more attractive to foreign buyers, which could improve U.S. export totals. Though Cotton prices have rallied since the May lows, some traders believe prices may need to rally further in order to “buy” acres for next season’s crop away from Corn and Soybeans. This has led to an increased speculative interest in the December 08 contract, which is priced just over 8 cents above this year’s new-crop December contract. Though the recent sell-off had liquidated a portion of the large net-long speculative open position, any further concerns of the recent credit crunch expanding may cause further long liquidation by commodity and hedge funds, despite improving fundamentals.
Looking at the daily chart, we notice December Cotton approaching the 100-day moving average. A weekly close above this level may be the key to further price appreciation, as many traders look at the 100-day moving average as a barometer of a bull or bear market. The 14-day RSI has moved above oversold territory but is still reading a rather weak 35.05. Major support is seen at the August 16th lows of 5560, with resistance found at the 20-day moving average at 6210. In early electronic trade, December Cotton is trading at 5908, up 40.
Mike Zarembski, Senior Commodity Analyst
