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Gnanasekar T.

Cotton futures on the New York Cotton Exchange fell on Friday, on speculative and option related selling taking sell stops on the way. Market is now looking towards Monday's US Department of Agriculture weekly crop progress report.

The initial sell-off in the week was attributed to favourable wet weather conditions in the dry areas of the cotton belt, including West Texas. In addition, the speculative position is expected to be at a record net long high above the 49.5 per cent of the open interest registered last week. Combination of an overbought market and better crop conditions due to improved weather were behind the sell-off. This was confirmed by the U.S. Department of Agriculture's Crop Progress report. As reported, USDA labelled 52 per cent of the US cotton crop as good-to-excellent compared with the previous week's 48 per cent, while 16 per cent of the crop was rated poor-to-very poor compared with 18 per cent last week.

In order to curtail the huge net long position the exchange increased the margin requirements by 50 per cent from $1,000 to $1,500. This would ensure that any higher rallies on cotton would be curtailed in the near term.

As expected the active contract December corrected downwards and is expected to trade in a new range from here now. However, a long term double bottom pattern is also visible on the chart targeting 55c in the near to medium term. A horizontal trend line support also lies at 45.32c and this will be a crucial support level for cotton in the near term. Any correction downwards should get supported above this level to keep the up trend intact. This also coincides with a 38.2 per cent retracement target from 36.80c- 49.80c.

Using Elliot wave analysis, this could be the beginning of a new correction in the bigger picture with the end of a third wave and a corrective fourth wave in progress. As expected, RSI after getting into the overbought zone with a negative divergence was responsible for prices correcting downwards. The averages in MACD, continue to be above the zero line in the indicator and as long as the averages are above the zero line in the indicator the current up trend will remain intact. Current prices have gone below the short term average of 9 day EMA and the 50 day EMA is now at 44.57c. Look for the correction to continue further. Important support levels are at 46.25, 45.32 & 44.57 cents. Resistances at, 47.20, 48.70 & 49.80 cents.

(The author is a Chennai-based technical analyst who tracks the international commodities futures markets. This analysis is based on historical price movement of the commodity concerned. There is risk of loss in trading.)

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