The Hindu Business Line : Cotton may test resistance levels

NYCE cotton futures closed sharply higher on Friday, on sustained fund buying hitting an eight-week high. The current move is considered a technical reversal as the fundamental factors remains bearish due to a large US cotton crop and record world cotton output.

However, nearby tightness in supply of world stocks added support to the fibre's contracts. Cotton future prices held well in spite of the bearish USDA numbers released last week and did not follow through to hitting new lows as this increase in crop size has already been discounted.

USDA Supply/Demand report 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. The US Department of Agriculture's weekly export sales report showed combined US net upland cotton sales at 246,300 running bales (RBs, 500-lbs each) for the week ending August 12 falling above market expectations.

The active December contract retraced sharply higher in line with our expectations.

Prices took support near the long term falling trend line point. Cotton futures pulled back sharply higher due to highly oversold conditions. Stop loss buying kicked in when crucial resistance levels were broken. December Futures has the potential to extend towards the falling trend line resistance point at 56 cents. However, caution should be exercised on getting unduly bullish as the current move is a technical correction and prices could fall back lower again.

Bullish reversal can be confirmed only on the break of 57.35 cents. Elliot wave analysis points towards a complex corrective structure currently underway. As mentioned earlier, we are in a corrective A-B-C pattern, which still looks to be in progress. Only a daily close above 57 cents will confirm that we have begun a new impulse.

RSI has now reached the overbought zone indicating a correction to take place. 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 47.66 cents and the 34-day EMA is at 47.85 cents.

Look for prices to test the resistance levels. Resistances, at 51.75, 52.50 and 55 cents. Supports at 50.75, 49.45 and 48.25 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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