When There Is No One Left To Sell . . .
One way to get a handle on what could happen in a market
is to monitor the number of traders that are short or long a particular futures
market. Every two weeks, the Commitment of Traders Report shows the number of
contracts that reporting traders are long or short futures markets. When a
market becomes lopsided and everyone is already short a contract, there is no
one left to sell to and an explosive short-covering rally can occur.Â
This was the situation today in coffee as the market
exploded and triggered buy stops in the largest rallies in the July and May
contracts in six months. The
Commitment of Traders Report, available on TradingMarkets
Futures Indicators Page, showed that funds were short over 6,000 contracts
going into today’s session. The market has held for the past two sessions at
58.80 and rallied out of what was essentially a two-day Slim Jim formation when
support at that level was not violated. Basis July pulled back and consolidated
in another horizontal formation and then rallied into the close to add almost
another cent, closing up 4.55 at 64.75 on more than double its average volume.
With Central American harvests winding down, the market is starting to shift its
focus to weather conditions in the world’s largest coffee producing country,
Brazil.Â
In other softs and fibers markets, July
cotton
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a new low but turned around mid-session from new contract lows, triggering a Turtle
Soup (buy) setup, at the April 2, 45.90, previous 20-day low. Turtle Soup reversal
setups occur on the same day rather than on the following day as in the Turtle
Soup Plus One setups that we track on TradingMarket’s Futures Indicators
page. The action in cotton sets up a Turtle Soup Plus One setup in cotton
for tomorrow. Basis July closed .38 higher at 46.53.
Going the opposite
direction as coffee, orange
juice
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PowerRating) plunged out of a low-volatility, daily Slim Jim pattern,
a condition brought to traders’ attention on the Multiple Days Low
Volatility reading. Contracts on the low-volatility lists often make
explosive moves, in either direction, as volatility reverts to its mean. Juice
closed at a multi-month low, down 2.55, or 3.23%, at 76.35.Â
Equity index futures took
a breather for a second straight session following two weeks of gains that had
left tech futures up as much as 35% in the
Nasdaq 100 futures
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of 2001. The futures opened limit down, in part due to a downgrade on the
semiconductor sector by a Merrill Lynch analyst. Naz futures clipped 6.29%,
closing 134.50 at 1819.00. S&P futures
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limit-down levels later in the session and closed on their lows, down 24.80 at
1226.00.
As stock index futures tumbled, T-bonds
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rallied in a flight-to-safety bid. The move
higher in bonds accompanied rallies in defensive sectors (e.g., oil, oil
services, and forest and paper products), demonstrating lingering skittishness in
equities and the presence of bearish sentiment. Basis June closed 24/32 higher
at 101 8/32.
In currency trading,
June dollar index futures
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setup, largely due to the buck’s decline against the euro, the unit most
heavily weighted against the dollar. Despite a report citing ebbing business
sentiment in Germany, the threat of higher inflation in Euroland is believed
will limit the European Central Bank’s capacity to cut interest rates. The ECB
meets this Thursday and the consensus is that it will leave rates unchanged, at
4.75%, .25% higher than in the US.Â
The prospect that a “reformist” Junichiro
Koizumi could win the election for a new Prime Minister in Japan tomorrow
bolstered the
Japanese yen
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high of the session. The yen added .0087 to close at .8306.
Finally, from the Implosion-5 List,
corn led the way lower in the grains, closing 5 1/2 lower at 196 1/2 on
news that plantings are progressing at fast pace. Soybeans are also
an implosion market and traded to a new low out of a descending triangle, a
situation pointed out in Friday’s Futures Market Outlook.