The Hindu Business Line : Cotton may test support levels

NYCE cotton futures closed lower on Friday on option-related speculative selling hitting 3-week lows in the process. The market rebounded when the selling pressure eased and weekend short-covering emerged during the close. Markets are waiting for news on growing conditions facing the US cotton crop and the problems facing cotton plants in key producers like China.

News of concern over the annual monsoon rains in key cotton consumer India and talk of more purchases of US cotton by other countries enabled cotton to recover from its recent lows during the week which proved to be temporary. The US Department of Agriculture's weekly export sales report had little impact in the market. USDA said combined US net upland cotton sales were 327,500 running bales (RBs, 500-lbs each), almost in line with expectations. Shipments stood at 270,100 RBs.

Markets will also analyse the impact of the testimony of the US Federal Reserve Chairman, Mr Alan Greenspan, on the dollar, which would affect the pace of US cotton exports. The effect of a stronger dollar is likely to affect cotton exports in the near term.

The active December contract pulled back towards the 50 cents level due to heavily oversold conditions and found strong resistance there. Support will now be at the 46 cents level. A break there should see cotton futures hit the falling trend line support point at 44 cents.

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 44 cents. 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 82.95 cents and therefore, believe that wave "C" is currently underway. It is possibly in the last leg of decline. 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 8-day EMA at 47.70 cents and the 34- day EMA is at 51.52 cents.

Look for prices to test the support levels and then start retracing higher. Resistances at 47.85, 48.50 and 49.50 cents. Supports, at 46.05, 45 and 44 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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