- Jo Earlam
- June 5, 2022
- 10:00 am
- 10 min read
New crop Z22 breaks out of its trading channel to the downside!
The further back you can look, the further forward you are likely to see. - Winston Churchill
CTN22 – 138.18 (-0.93)
CTZ22 – 117.90 (-2.20)
CTH23 – 113.45 (-2.32)
CTK23 – 110.30 (-2.25)
CTN23 – 107.18 (-1.92)
Zhengzhou CF209 – 20,320 (-195)
Cotlook “A” Index – 156.95 (-0.50)
Daily volume – 26,288
AWP – 139.36
Open interest – 211,611
Certificated stock – 1,087
July / Dec spread – (+20.28)
July Options Expiry – 10th June 2022
July 1st Notice Day – 24th June 2022
September Options Expiry – 19th August 2022
December Options Expiry – 11th November 2022
December 1st Notice Day – 23rd November 2022
Introduction
– Old crop July continued to drop over the course of another volatile week that saw a 788 point trading range between 134.12 and 142.00 before closing the week down 124 points. Volume was understandably good and averaged 33,718 futures daily, noting we are in the roll period when funds must roll out of old crop July into new crop December. As a result ,the week’s trading was dominated by spread trading and there is just 1 week to go until July option expiry!
– For new crop December, it was also a volatile week trading in an even wider range of 881 points between 114.92 and 123.73 before finishing the week down 505 points at 117.90 and its lowest weekly close since 8th April!.
– Interestingly, when we look at the technical picture for December it has undeniably broken out of its long term trading channel to the downside as well as closing the week below its 50 day moving average but above its longer term 100 and 200 day moving averages.
– When I was a cotton trader some 14 years ago I always had a note in my diary for the last week of May until July expiry to warn and remind me of the extreme volatility one should expect at this time of year. It is a lesson that has served me well over the years and continues to do so for EAP’s clients and is why we have long warned about not being involved in July futures into expiry if it can possibly be helped.
– Over the week, the average daily range for N22 has been 467 points and for December 415 points. The GSCI roll begins next Wednesday 8th June and lasts for 5 consecutive business days. Next Friday we will also have the June WASDE to look forward to, July 1st notice day on the 24th June and not forgetting the all important USDA plantings survey at the end of the month!
– The weekly USA Export sales report came out on Friday and showed net sales of 354,200Rb with China and Vietnam leading the top sales destinations!
– Thanks to our friends at IAG for pictorial evidence of what has so far been exported for the current season.
– The CFTC COT report showing traders positions as of last Tuesday showed Managed Money (MM) to have been net sellers of 1,388 contracts taking their net long to 60,324 contracts. Between MM, OR and NR their net long is now down to 80,993 contracts.
– We have bleated on in recent weeks about our concerns regarding the Macro picture and with that in mind have included the charts of two of our favourite leading indicators for the Cotton market being the charts of Weiqao and Texhong.
It does not take a rocket scientist too see that these charts are not looking too healthy!
– Moreover at the height of Covid when anything online suddenly became in vogue we saw the likes of Zalando and Asos share prices treble in value. A further look at these charts today and one can see that they are back down to near their pre covid levels.
– Things on the high street and even online does not look too healthy to our mind and why we reiterate the demand side of the cotton equation looks in serious doubt. Frankly the charts of all 4 of the attached speak for themselves!
– We have already pointed out earlier in this report that this is a period of extreme volatility for the cotton market at this time of year. It has been no different for Cotton’s big brothers of Soy, Corn and Wheat. All of them have had very strong years and like Cotton have been on a lengthy two year bull run that in our opinion is nearing its finale if it has not already.
– Technically, Z22 is below its 50 day moving average and broken trend line support and is likely to test its 100 and 200 day moving averages in the days ahead.
– If history is the guide then one should expect this to happen quite quickly and could be a scary move just as it was in the 3rd quarter of 2011 when we have regularly bored our readers of 25% moves down, taking between 3-5 weeks for Cotton and its big brothers.
– Can it happen again? Of course it can and the days ahead promise to be rather volatile and exciting, especially for those not familiar for what can and does happen in our most volatile of commodities!
Conclusion
We maintain that involvement in N22 is something to avoid if possible, but for new crop December we maintain this contract is very fully valued above 125c/lb and the recent spike in N22 offered a golden opportunity to lock in a good proportion of new crop sales 25c/lb higher than one could get just 6 weeks ago. Any bounces in Z22 to 122c/lb up to 130c/lb were we to get them, should be sold in our humble opinion.
Useful links
*Please note that we only share CFTC CTO on weekend reports.
Written by:
Jo Earlam
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