The Softs Pit Review

For the week of October 26th, 2009

By PitGuru Jurgens H. Bauer

For the Soft complex this past week it was the direction of the dollar that was the overwhelming driver. Prices improved when the dollar weakened, and when the dollar showed any strength, prices stalled (or gave back gains). It should be no surprise that this action (or reaction) is spurred by the speculative community.  The trade doesn't change positions like that. Instead the trade uses the markets to offset risk against their cash market positions and those positions don't switch around on whims, or minor moves in the dollar. Perhaps this lends credence to the argument that trading on whims is behind the desire to restrict speculation and raise concern regarding position limits and stricter CFTC regulations.

Anyway, given the action of this past week, one cannot help but wonder if US Dollar index could be preparing to make a stand around the 75.00 level. Deeply oversold, any rally in the dollar will likely only be a reaction to that oversold condition and any more than that might be seen as a buying opportunity...that is until, and unless, the US Dollar index moves above 76.00 and 77.00. Should the dollar index close above 77 expect massive shorts covering their dollar positions.

Cotton: I need to ask... What's holding this market up? Weather, a late crop, or is it the positioning of spec money... money that could easily decide to abandon those longs?  Well, if they do decide to do that, good luck, ‘cause it won't be easy dumping volume. Who’s going to take it off your hands here? Maybe it’s time to look to buy some puts. Although weather remains a concern to the cotton market, that is not what kept values supported this past week. Instead, values remained firm due to the continued to commit money to cotton by specs. I've already seen open interest move up dramatically from this summer. Since that time open interest has increased over 60%. The last couple of weeks alone open interest has climbed by more than 35,000 contracts! Most of those new longs belong to specs, while to a lesser extent index funds. Obviously it is the trade who accounts for the new shorts. The last CFTC report (from October 13) showed the trade 12.5 million bales net short in Futures and Options. Positions related to index funds amounted to 7.7 million bales net long. All other speculators combined had the remaining 4.8 million bales in net longs. Since then the trade position has probably grown close to 14.0 million bales net short leaving one to wonder how much more the trade is able and willing to add to this position - maybe things are vulnerable either way. One thing is, participants need to be mindful of what can happen, remember the debacle in March of last year? Bottom line, will the market break out above the 70 cents level remains to be seen. I am inclined to bet it won't, but will only use options.

As for the remainder of the complex... Cocoa prices seem overbought and due for a setback. Coffee prices crashed. Sugar prices dropped for the week, so did OJ. It seems fundamental factors are old news. In sugar, now that Brazil's sugar industry week has ended, it should see a return to better volume. I look for Monday's action to set the tone for the remainder of the week in sugar. Technically, it will be important to see how sugar reacts to any pressure. Any move below last week's lows ought to bring renewed selling. Cocoa chart formations suggest a reversal, even though the trend remains upward. Perhaps this may offer an opportunity to own some puts. A close below 3160 is needed to pick up steam on the downside. Coffee has shaken out some longs and needs to return back over 138.30 and then 142. If it can do that then there ought to be more potential on the upside; but as it stands now, coffee looks tired.

The main focus will, of course, be on the dollar so keep a watchful eye on whether 7500 can hold in DXZ.

***chart courtesy Gecko Software’s Track n’ Trade Pro

Past performance is not necessarily indicative of future results.