The Hindu Business Line : Cotton prices may move up

NYCE cotton futures closed lower on Friday, due to speculative selling on very low volumes. Cotton futures hit almost a four-month low this week on poor fundamentals.

Markets are digesting news of larger cotton crops in important producing countries like China and the US. News of concern over the annual monsoon rains in key cotton consumer India and talk of more purchases of the US cotton by other countries enabled cotton to recover from its lows. Markets are also taking into account talks of hot weather in the US Delta states which could possibly be stressing cotton crops in that area.

Cotton futures did not react to the US Department of Agriculture's weekly export sales report which showed combined US net upland cotton sales at 337,500 running bales (RBs, 500-lbs each), falling in line with expectations. Shipments stood at 206,500 RBs, at the lower end of expectations. Cotton futures dropped lower following a bearish Cotton demand/supply report by the US department of Agriculture on Monday.

The active December contract is consolidating after hitting a low of 46.60c. Current move has failed to hold on to support at key levels leaving it vulnerable to test further lows.

The important support between 47.80c and 48c a long-term horizontal trend line support point which has provided good support for cotton futures in the past has been broken convincingly. Support will now be at the 46c level. A break there should see cotton futures hit the falling trend line support point at 44c. We have also discussed the head and shoulder pattern appearing in the month of March as seen in the above chart which has worked well. The target for this pattern is also near 44c.

This will probably end the bearish cycle for cotton and a possible recovery can be seen from there. Elliot wave analysis points towards a complex corrective structure currently underway. The A-B-C correction started from the high of 82.95c, and therefore believe wave "C" is currently underway.

RSI is now in the heavily oversold zone indicating a correction upwards to occur in the coming week. The averages, in MACD are still below the zero line in the indicator suggesting underlying bearishness. Only a cross over of the averages above the zero line will confirm a trend reversal.

Current prices are below the short-term average of the 8-day EMA at 48.45c and the 34-day EMA is at 52.82 cents. Look for prices to test the support levels and then start retracing higher. Resistances, at 48.50, 49.75 & 50.25c. Supports, at 47.35, 46.80 & 45 respectively.

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

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