The Hindu Business Line : Cotton futures may move lower

NYCE cotton futures ended marginally lower on Friday, on thin volumes as worries about slowing Chinese demand subsided. The active contract fell to an 18-month low on Thursday at 56.65 cents after China moved to limit bank lending to slow its fast growing economy.

Heavy rains devastated Chinese cotton crops last year, turning the country into a net importer. China's big purchases of cotton in 2003 lifted prices to their highest level since late 1995. US cotton exports would fall significantly if a ruling by the World Trade Organisation confirmed and Washington slashes subsidies.

The active contract lost steam and fell sharply lower against expectations. We have however, been maintaining that the bigger picture still remains vulnerable to break the recent lows. Good resistance was seen at the 65 cents level. Once the support at 61.20 cents gave way, it was a free fall and our original target at 56.50 cents was once again tested and found strong support for the second time in two weeks. This will be a crucial level to watch in the near term.

A break of this level is bound to create a strong reaction. Good support can be expected at 55-55.50 cents level a falling trend line support point and an important technical level. This also happens to be the 50 per cent Fibonacci retracement level for the move from 28 to 84.75 cents. Using Elliot wave analysis, we should now be in the last leg of wave "C" currently in progress now. 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.

RSI is now in the neutral zone indicating that it is neither overbought nor oversold. The averages, in MACD are still below the zero line in the indicator. Only a break above the zero line will signal a reversal in trend.

Current prices are below the short- term average of 8-day EMA at 61.38 cents and the 34-day EMA is at 63.22 cents. Look for prices to head lower.

Resistances at 61.25, 63.35 and 65 cents. Supports, at 58.65, 56.60 and 55 cents respectively.

(The author is associated with the Multi Commodity Exchange of India (MCX). The views expressed in this column are his own and not 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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