The Hindu Business Line : Cotton futures may head higher

NYCE cotton futures closed higher on Friday on speculative buying with some trade selling noticed which curbed any hopes of a sharp rally again. Cotton Outlook reduced its 2003/04 estimate for global cotton output by 31,000 tonnes to 19.86 million tonnes on Thursday, reflecting a further decline in production prospects in India, but the overall loss was pared by better prospects in key producers China and Pakistan.

China harvested 4.87 million tonnes of cotton in 2003, down a year-on-year 0.9 per cent despite an acreage increase of 20 per cent, the State Statistical Bureau said on Tuesday. The crop was mostly damaged by rain in major cotton-growing areas along the Yangtze and the Yellow rivers last year. China has increased imports of cotton in order to bring down domestic prices and help textile firms amid a supply squeeze. China's cotton imports rose about 400 per cent in 2003 to 873,597 tonnes. U.S. Department of Agriculture's weekly export sales report that cotton shipments hit a marketing year peak of 354,600 (500 lb) running bales, up 21 per cent over the prior week's 293,600 RBs against trade expectations between 290,000 to 325,000 RBs. China was the major buyer again taking 215,900 RBs of cotton.

The active March contract is still moving in a tight range. No change in view. The channel break point at 72.10 cents will be an important level to watch and a break of that can take it lower.

Initial support will be seen at 73.60 cents, which is a rising trend line point. Major support continues to be at 65 cents and believe this could be a low for sometime and a possible reversal expected form there.

A gap is also seen at 71.25 cents when it broke it higher earlier, and these gaps have the tendency to be filled on its way down. As per Elliot wave analysis we have probably completed a corrective leg, and a new impulse wave is in progress. And as long as 68-70 cents holds well, there is a good possibility for a retest of the highs at 84 cents again. However, by looking at the equality target for the impulse, it looks like the high at 84.80 cents will not be easily broken.

RSI is still in the neutral zone indicating that it is neither overbought nor oversold. The averages, in MACD have gone above the zero line in the indicator convincingly indicating that the trend could again turn bullish. However, another break lower of the zero line will confirm a bearish reversal in cotton futures. Current prices are close to the short- term average of 9-day EMA at 74.90 cents and the 50-day EMA is at 72.32 cents.

Look for prices to head higher again. Resistances at, 75.50, 77.55 and 78.35 cents. Supports at 73.60, 72.10 and 69.20 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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