Something went very awry for the bulls today in regards to cotton, but the same applies to other commodities and stock indexes.

Cotton was able to approach if not test the highs it made on Tuesday, April 30, but around 11:30 a.m. EDT, prices gave back about 100 points. But the market came unglued from 1 p.m. EDT on ultimately falling to within 13 pts of limit down in the July and December posting its lowest close since February 26. Futures volume was just a hair under 30K.

Open interest was down last Wednesday and Thursday but up modestly on Monday but jumped nearly 3K with TuesdayΆs strong up move.

I suspect open interest after todayΆs performance will be down as new longs fled the market. However, recent short covering to book profits by the close of business on April 30 were likely added so the net/net decline may not be as much as one would expect.

As to why cotton ΅fell out of bed,Ά there are several reasons, although I could not find one in particular that was an ΅a-haΆ explanation.

The day began with a somewhat disappointing official number from China regarding its latest PMI at 50.6.
Then came the ADP payroll showing an increase of only 119K jobs in the US during April, below analystsΆ expectations.
After seeing a string of poor numbers for March and the impact of sequester on this month, hopes for any rebound in the US or World economy have slipped.
Since cotton consumption is tied to the “well-being” of global economic growth, traders were fearful of the negative impact. In that same vein, other commodities such as crude, soybeans, gold and silver were also under pressure, adding to the pessimistic view of commodities in general.
The downward correction in US stocks did not help, either, as they responded to this morningΆs poor data.
In addition, the rally from last Wednesday through Tuesday of just under 5 cents in the July came on light volume, not as positive as wanted by the bulls to cement their position. Since Monday and TuesdayΆs rallies could have been tied to their being the last 2 days of the month, the price action may have been out of alignment with previous fundamentals.
Although mills made significant purchases last Wednesday in the 83.00 area, they were unwilling to chase the recent rally and lack of support once the selling began may explain how quickly the drop unfolded.
Finally, despite crop delays, another week of questionable weather in the Delta/Southeast (too much rain) and lack of rain in Texas along with a few days of below normal temperatures across the High Plains, buyers were not to be found in the December contract, either.
The Jul/Dec spread survived todayΆs massacre, giving up only 35 points to close at 83 points over.

My technician, who has been friendly to cotton, read the handwriting on the wall. He said after todayΆs close: “I was expecting a few days of downward bias in July Cotton but this was way more aggressive than called for. Something has gone very wrong as COTN enters a swing day on Thursday.”

In my last 2 reports I spoke of a possible rally to 85.50-88.50, and the market did rally to 87.60. I was dubious of his overly-friendly attitude to cotton, and todayΆs drop confirms those suspicions. Mills have dug in their heels with desired pricing levels and the increase in cotton area and pending rains across West Texas may be trumping worries of planting delays.

The macro picture for cotton looks lousy and although it managed to avoid the price pressure in other markets for awhile today, it could not hold on through the entire session. The FOMC report did not help and if anything reinforced tradersΆ attitudes of increased risk to the (US) economy.

I am surprised by the size and swiftness of the drop and agree with DaveΆs analysis. Having said that, ThursdayΆs export data should be very healthy, with above average sales and steady shipments. It may take some time to sort through todayΆs action but bulls have been dealt a crushing blow making any futures advances hard to sustain without strong economic input and time is growing short for a significant upturn in the US/global economy to benefit the July 2013 contract.

December will increasingly take on trading its own fundamentals helped by the upcoming first official view of supply/demand for 2013/14 in the USDA May 10 report.

If World Weather and other credible weather sources are correct and Texas received a series of soaking rains during this month, given its importance to US production, prices will reflect the importance of rains vs the planting issues in the Delta/Southeast.

© Sharon C Johnson, Knight Futures, Atlanta, Georgia, USA