It was a rough day for the bulls as MondayΆs price behavior was a precursor to the limit down action today. The session opened on a weak note as outlined in my Monday, August 19, report but failed to find much in the way of support.
An intra-day low of 90.62 held for awhile and even managed a 90 pt rally but by 10:45 AM, a huge sell-off occurred taking the December contract to within 25 pts of limit down. A drop of more than 200 pts unfolded within seconds as massive sell stops were hit.
Adding to the downward push was a lack of buying from the trade, meaning mills. By 11:30 AM EDT, the December touched limit down and remained there until the close. Pools were not as large as I would have expected at just over 800 contracts in the December.
Estimated futures volume was 25,059 contracts with options adding another 13,151. The synthetic close per option sources was 8645, 41 pts below the futures settlement in December. As mentioned in print and to some of you in recent days the huge build-up in open interest was of a concern to me as it suggested too much participation by the spec funds.
If nothing else, the market appeared to be getting in front of itself as fundamentals may not warrant such a rally and to the mid 90′s basis December. There was talk of IndiaΆs higher crop estimate of 29 mln 480-lb bales by way of the Cotton Association of India being a huge contributing factor with the market break but I suspect many traders were not aware of this new development until afterwards.
My technician, Dave, has been friendly to cotton since its breakout on August 7, but he pointed out over the weekend the upcoming week was “3 up” and some correction was likely.
In addition, where the market closed on Friday, August 23, relative to the preceding week would set the tone for the following week. TodayΆs limit down close does not rule out the potential for a higher close at the end of the week, but it looks very suspect. Dave had the following to say after todayΆs limit down close: ”December Cotton came unglued and is nearly half way back to the June low. That will provide a floor around 87.72 over the next couple of days.”
The high sustained last Friday, August 16, was 9372, exactly 12 cents higher. A 38% retracement of the 12 cent drop of 89.22 has already been met and if DaveΆs 87.72 fails to hold, we can next look at the 62% retracement of 86.22.
Since the previous high from July 11 was 87.11, this level should hold, if only temporarily. However, I can concerned given the huge build-up in spec longs, a break of 6-7 cents is not sufficient as only a small portion of those longs would have been exited by later this week.
Mills have stood their ground through the run-up of the past two weeks and their buy orders, at best, start near 84.00 but increase on a scale-down basis.
Sharon C Johnson
