– Old crop N23 is increasingly dangerous in our opinion and a contract we prefer to avoid in preference of concentrating our efforts on new crop Z23.
– Whilst we may not have anticipated the ferocity of last week’s rise for N23 (or predicted it for that matter) we certainly made some right calls over the season just past.
– In our report of the 28th October when Z22 closed at just above 72c we stated the following.. “The big question for so many right now is when is the pain going to stop and to that end we have included a cotton continuation chart below showing prices from 1970 to the present day. Fibonacci levels are identified for this century alone which show the lowest and highest price prints of 28.20 and 227.00 and identifies the 70c/lb level as a major area of support! Catching the falling knife is not a recommended pastime and prices almost always overshoot to the downside and we expect this time to be no different. However, at some point you have to be ready to change the narrative and noting Cotton is very oversold right now the time is fast approaching to no longer be short”
– In the last EAP report of the 2022 calendar year we stated in our conclusion “We see prices in the mid to high 80’s as fully valued and our bearish stance is based on a lack of demand …… we would not want to be short Cotton long term under 70c/lb with a sideways market likely for the rest of the 22/23 season”.
– Looking at the chart of N23 below we believe nothing much has changed to alter any of the aforementioned statements made more than 6 and 4 months ago respectively, all of which we are pleased to report proved correct!
– New crop Z23 is where we feel the focus should now be noting the difference in open interest between the two contracts is down to just 7k contracts in favour of N23, based on Friday’s close! By the end of next week we fully expect Z23 to be the effective front month on account of holding the highest open interest and once again this is even before the Rogers and GSCI roll periods begin!
– Z23 is actually trading above its medium (50 day) and longer term (100 & 200 day) moving averages and to some could be deemed to be friendly; but in fairness Z23 has see-sawed above and below these for some time now!
– Looking at the chart of Z23 below it is clearly a sideways chart, trading in a contracting triangle that will at some point break out one way or the other. We believe that move will be to the downside.
– The 22/23 season was an inverse season where highs were seen early and lows later in the season. We are of the opinion such an occurrence could occur this coming season as well. An over supply of Cotton and carryover of outside growths from the previous season can provide a hangover for end users. Stocks of high priced physical Cotton and yarn will likely take time to be consumed, coupled with late and high basis arrivals to come, will likely weigh upon the market for many weeks and months ahead.
– The flat position of funds is a valid and counter argument to EAP’s less than friendly stance and must be watched carefully and we will also be keeping a watchful eye! The lack of forward coverage will also mean spot business will keep the market buoyant too, but overall we feel unprofitable stocks of physical Cotton and Yarn will eventually push the market to lows that few today think possible!