The Hindu Business Line : Cotton futures may head higher

NYCE cotton futures closed marginally higher Friday, as cotton futures rebounded from the previous day's low on the back of a bearish USDA supply/demand report which also projected the second-biggest cotton harvest on record.

USDA forecast US cotton production in 2004-05 hitting 20.18 million (480-lb) bales, near the all-time record of 20.3 million in 2001-02 and well above market expectations. World cotton output in 2004-05 was seen at 106.59 million bales, nearly six million bales above world consumption of 100.66 million, the USDA said. However, future prices held well in spite of the bearish news and did not follow through to hitting new lows as this increase in crop size has already been discounted. Fundamentally, cotton has been weighed down by near-ideal growing weather in the US and in other growing countries. Expectations of a bumper cotton crop in the US and other growing countries have likely been factored into the cotton market.

The active December contract moved lower with a gap. Good resistance was seen at 46.50 cents and inability to cross this level led to a sell-off. Prices took support near the long term falling trend line point. Technically, a retracement is possible up to 44.50 cents and inability to cross this level will see prices attempting to test the lower end of the trend line support at 41.25-50 cents. A gap from 45.22 cents would get filled on the way up. Major resistance will be at 46.50 cents.

Elliot wave analysis points towards a complex corrective structure currently underway. The A-B-C correction begun from the high of 82.95 cents and therefore believe that end of wave "C" could happen anytime now and a daily close above 46.78 cents will confirm this eventuality. RSI is now in the neutral zone indicating that it is neither overbought nor oversold.

It is also showing a positive divergence, where prices are making a lower low which is not confirmed by a new low in the indicator. 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. MACD is also showing a positive divergence, which is an important reason for our upward bias. Current prices are below the short- term average of 8-day EMA at 45.02 cents and the 34-day EMA is at 47.75 cents. Look for prices to retrace higher. Resistances at 44.50, 45.25 and 46.50 cents. Supports at 44, 43.75 and 42 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. He can be reached at gnanasekar_thiagarajan@yahoo.com)

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