NY cotton futures leap over holiday period

Plexus Cotton Limited reports that New York futures made a big move to the upside over the holidays, with March gaining 750 points since December 22 to close at 94.74 cents.

After closing at 85.12 cents on December 14, the market has rallied an impressive 962 points over the last 14 sessions. However, while this move looks quite constructive on the chart, the fact that open interest has been declining sharply on Tuesday and Wednesday should be seen as a warning sign. Typically a powerful uptrend is validated by strong volume and rising open interest, which signals that a trend has momentum.

Surprisingly, open interest increased by only 1'531 contracts since December 14, which is not what we would expect to see in a ten cents move. Even more disappointing is that March open interest decreased by 7'880 lots, with most of this drop happening over the last two sessions.

This indicates that it was primarily short covering and profit taking that fueled the last four cents of the advance. Once the shorts are done covering, the buying will have to come from some other source, otherwise upside momentum will stall.

A lot of the short covering seems to be tied to the selling of physical cotton. When basis-long positions get sold to mills, merchants buy back the futures short that was hedging the physical long position.

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