The Hindu Business Line : Upward correction in cotton

NYCE cotton futures ended higher on Friday, mainly on speculative and option-related buying as the market's focus lies in the release of the important report next week on the cotton plantings report as it will determine estimates for 2004-05 crop and exports in the monthly USDA supply/demand report to be released on July 12.

Last March, the USDA pegged US intended cotton plantings at 14.4 million acres. In 2002-03, actual US cotton sowings reached 13.5 million acres.

Markets are also encouraged by the steady pace of export sales as seen in the USDA weekly export sales report. USDA said that old crop and new crop US net upland cotton sales hit 259,600 running bales (RBs, 500-lbs each), almost in line with expectations.

US annualised cotton consumption released from the monthly US Census Bureau report reached 6.23 million (480-lb) bales. In the June USDA monthly supply/demand report, US cotton consumption was seen at 6.3 million bales. The active December contract touched a one-year low followed by an impressive pullback. Support near the falling trend line point at 52c was quite pronounced.

Resistance at 55c is strong right now and a daily close above this level will be bullish for cotton futures. As mentioned in our earlier update, inability to cross the resistances at 59.35c will see cotton future prices head to the next important support point. Only a move above 58c will reinforce a bullish scenario for cotton futures again.

The correction seen right now can extend higher into the 60c zone again and a daily close above that level will signal a bullish reversal for cotton futures. Therefore, we believe this move to be corrective in nature. Elliot wave analysis points towards a complex corrective structure currently under way. It is still difficult to call for a new impulse to begin from here unless the important resistance at 65c is overcome.

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 suggesting underlying bearishness. Only a crossover of the averages above the zero line will confirm a trend reversal. Current prices are above the short-term average of 8-day EMA at 54.20c and the 34-day EMA is at 57.80c. Look for prices to correct upwards. Resistances are at 55c, 56.70c and 59.35c, and supports at 52.50c, 51.25c and 48.25c 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 the employer. This analysis is based on the historical price movements and there is risk of loss in trading.)

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