The Hindu Business Line : NY cotton may correct lower

NYCE cotton futures vaulted higher and closed at another five-year high on fresh speculative and options buying on news that crop losses in top grower China are much higher than initially believed. Speculative and fund buying jacked up the market as it notched on to the news of China's crop and potential import plans.

The Beijing's State Statistical Bureau (SSB) said it expected the country's cotton output to be unchanged from last year's 4.9 million tonnes despite a 20 per cent increase in acreage after wet weather and floods ravaged the crop. USDA forecast China's cotton output in 2002 at 22.6 million (480-lb) bales and pegged it this year at 25.5 million. Helping the rally along was news from the USDA's weekly export sales report, where China emerged as the top buyer of US upland cotton with total purchases of 227,100 running bales (RBs, 500-lbs). USDA reported net upland cotton sales of 319,000 running bales (RBs, 500-lbs), much higher than trade expectations of 140,000-160,000 RBs. China led the list of buyers with 227,100RBs.

The active December contract moved continues to move higher with every minor correction seen as an opportunity to buy. The resistance level at 74.50 cents we identified last week has been broken with considerable ease. If no signs of correction is seen at the current levels, we should be heading much higher and it is difficult to put a target currently. A diagonal triangle pattern is seen in the chart, which normally signals an end to the rally.

However, a break of the high at 76.95 cents will see cotton futures zooming to new highs. Earlier in our updates, we had mentioned a long term target for cotton futures at around 75 cents and we have already crossed that. The rising trend line point at 72 cents will be crucial for the current rally and a break of this level will suggest a deeper correction ahead.

As per Elliot wave analysis we are on the last leg of an impulse third wave in progress with an ideal target at 78 cents. A fourth wave correction is expected from there. RSI continues to hover in the overbought zone indicating a correction to take place. A negative divergence is still noticed where prices are making a higher high which is not confirmed by a higher high in the indicator. The averages, in MACD are strongly above the zero line in the indicator.

As long as the averages are above the zero line the overall up trend will sustain. Current prices are slightly above the short-term average of 9-day EMA at 71.75 cents and the 50-day EMA is at 63.58 cents. Look for prices to correct lower. Resistances at, 76.20, 77.00 and 78.20 cents. Supports at 74.50, 72.00 and 68.85 cents respectively.

(The author is a trader with Scotiabank and the views expressed by him are his own and not necessarily that of his employer. This analysis is based on the historical prices movements and there is risk of loss in trading.)

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