The Hindu Business Line : Cotton to test support level

NYCE cotton futures finished sharply lower on Friday on speculative selling and profit taking before a long weekend. Markets were also digesting the possible effect of hurricane Frances as it was downgraded to category 3, from category 4. Prices hit a 9-week high on all-round buying after a tropical storm hit cotton farms in the US and a possibility of another tropical storm, Frances, forecast to hit the Florida coast.

The next important fundamental report will be the supply-demand report on September 10 from the USDA. That will be the second detailed report on the supply-demand equation for cotton in the 2004-05 marketing year (August/July).

As mentioned earlier, the current pullback is considered a technical reversal as the fundamental factors remains bearish due to a large US cotton crop and record world cotton output. Another supportive influence was the USDA's weekly export sales report. The USDA said that net upland sales were 205,800 running bales, up 78 per cent from a week earlier. Exports of 171,700 RB's were 6 per cent above the previous week.

The active December contract moved in our expected lines so far. Prices could not cross the important resistance at 56c which is the long-term falling channel resistance level. As mentioned earlier, 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 57.35c. Support should now be seen at 50.65c. 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 57.59c will confirm that we have begun a new impulse. This is also the 200-day EMA-level watched by traders closely. RSI is back in the neutral zone indicating that it is neither overbought nor oversold. The averages, in MACD are above the zero line in the indicator suggesting bullishness. However, it needs to be seen if the momentum can sustain in the coming sessions. Only a crossover of the averages below the zero line in the indicator will suggest a bearish reversal now. Current prices are below the short- term average of the 8-day EMA at 52.03c and the 34-day EMA is at 49.66 cents. Look for prices to test the support levels. Supports at 50.65, 49.10& 48.25c. Resistances at 52.50, 53.35 & 55 cents 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. He can be reached at gnanasekar_thiagarajan@yahoo.com.)

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