The Hindu Business Line : Cotton futures may head lower

NYCE cotton futures closed lower on Friday, after the much expected USDA sales report came as per market expectations and failed to ignite a rally ahead of March cotton contract's first notice day.

In its weekly export sales report, USDA said the US net upland cotton sales reached 566,700 running bales (RBs, 500-lbs each), compared with 703,100 RBs last week. Shipments hit 287,100 RBs, versus 348,400 RBs the prior week. China, the world's largest cotton-consuming nation, was again the primary buyer, purchasing 309,200 RBs of US net upland cotton for delivery in 2003/04.

China has emerged as a huge buyer of US cotton after its crop was damaged by severe weather. During its annual outlook forum Friday, USDA predicted that domestic use and exports of US cotton is expected to decline in the 2004/05 marketing year. The weekly cotton spec/hedge report from the New York Board of Trade showed that speculative players were 7.6 per cent net long compared with about 18 per cent net long the prior week.

The dollar's recent rebound and strength could have also caused some concerns as a weaker dollar would help US exports.

The active March contract saw a corrective pullback with the underlying trend still remaining bearish. Support will be at 64.25 cents level and a close below this level should see future prices tumble lower. As mentioned in our earlier up dates, a head and shoulder pattern is in the making, which is a very bearish indication of prices to fall lower. The neckline point is at 64.65 cents and a weekly close below this level will confirm a bearish tone for cotton future prices in the months to come.

Near term support will be between 64- 65 cents and another important support point lies at 62 cents which is also a 61.8 per cent fibonacci retracement point for the move from 48.15 to 84.80 cents.

As discussed in our previous up date, a wave C is in progress. The move from the peak at 84.25 to 65 cents is possibly a corrective wave A and the subsequent pullback to 76.20 cents is a wave B. The current move should be a wave C targeting close to 58 cents.

RSI is back in the neutral zone indicating that it is neither overbought nor oversold. The averages, in MACD are below the zero line in the indicator convincingly indicating the bearish trend to continue. Current prices are lower than the short- term average of 9-day EMA at 67.38 cents and the 50-day EMA is at 70.35 cents.

Look for prices to head lower. Resistances at 68.50, 69.25 and70.80 cents. Supports at 66.50, 64.50 and 62 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 price movements and there is risk of loss in trading.)

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