The Hindu Business Line : Cotton futures may head higher

NYCE cotton futures ended sharply higher on Friday, reaching one month highs on heavy fund and speculator buying coupled with good option interest by the trade. Cotton prices slumped to 18-month lows last Thursday on worries about slowing Chinese demand, after China moved to limit bank lending to slow its fast growing economy.

Chinese cotton crops were devastated by heavy rains 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. Markets will now be focused on next Wednesday's May USDA supply/demand report, which is seen taking the first broad look at the 2004/05 season and giving further guidance on key issues like US and Chinese output.

Markets will also look forward to the Planted acreage numbers which are expected in the month of June. This would give an idea of how the planting season goes. Thursday, USDA reported in its weekly export sales data, total sales of 156,700 running bales, up from last week's 93,500. Shipments at 281,000 RB were below last week's 351,000 and 29 per cent below the four-week average.

The active contract pulled back quite sharply from near the previous lows. There is a double bottom formation in the charts, which is quite bullish for Cotton futures. The first sign of resumption of bullishness will be seen on the break and a daily close above 66 cents, an important resistance level. Another important resistance level after that will be at 67.65 cents a falling trend line resistance point.

Good support can be expected at 61cents again followed by the 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 looking for signs of a new impulse to begin from here assuming that wave "C" got over at 56.65 cents. 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 bullish reversal. Current prices are above the short- term average of 8-day EMA at 61.68 cents and the 34-day EMA is at 62.90 cents. Look for prices to move higher and test the resistance levels. Resistances, at 65, 67.55 and 69.05 cents. Supports, at 63, 61.25 and 59 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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