The Hindu Business Line : Cotton: Bullish reversal on cards

NYCE cotton futures ended slightly lower on Friday, with uncertainties on future market direction. Rise in fuel prices will have a strong effect on cotton this year. Due to high prices of fuel, fertiliser and other agricultural inputs, cotton farming is not expected to show profits this year. Cotton futures received a boost on Thursday from better-than-expected export sales then saw speculative short covering move in to boost the market coupled with good trade buying too. Net upland sales of 143,300 running bales were one-tenth above the previous week and the 7 per cent over the prior 4-week average, the US Department of Agriculture reported Thursday. Exports of 2,90,200 RB were 3 per cent above the week earlier, but 19 per cent under the prior 4-week average. The monthly USDA supply/demand report contributed to some weakness in the market initially. The USDA forecasts US cotton output in 2004/05 at 17.60 million (480-lb) bales from 18.26 million in 2003/04 and world production for 2004/05 was seen at 102.50 million bales against 93.49 million bales produced in 2003/04.

The active July contract has moved higher in line with our expectations. As mentioned in our previous up date 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 66c, an important resistance level. This level was tested on Friday, however, it closed lower than that. Another important resistance level after that will be at 67.65c a falling trend line resistance point and the 38.2 per cent Fibonacci retracement level for the move from 84.80c to 56.65c. Good support can be expected at 62.25c now, which is a fractal bottom.

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 56.65c. The move from the peak at 84.25 to 65c is possibly a corrective wave "A" and the subsequent pullback to 76.20c is a wave B. This was followed by a sharp move lower as wave "C" to 56.65c. RSI is now 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 suggesting a bullish reversal in the offing.

Current prices are above the short-term average of 8 day EMA at 63.85c and the 34-day EMA is at 63.10 cents. Look for prices to move higher and test the resistance levels. Resistances, at 66.25, 67.55 & 69.05c. Supports, at 63.85, 62.25 & 59c respectively.

The author is associated with the Multi Commodity Exchange of India (MCX). The views expressed in this column are his own and not of his employers'. This analysis is based on the historical price movements and there is risk of loss in trading.

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