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Monday, Sep 27, 2004

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Bearish outlook for NYCE cotton

Gnanasekar T.

THE NYCE cotton futures finished lower on Friday, on trade and speculative selling due to underlying pressure on expectation of a large US and world crop.

Another tropical storm expected to hit the Florida coast did not worry the markets much as the expectations of large production persists. Market participants have been bearish on cotton as they pointed to a record crop in the US and large crops in places like China, the world's largest producer and consumer of the fibre.

The US, the world's second biggest producer, is expected to harvest a record cotton crop in 2004/05 of 20.9 million (480-lb) bales. Sentiment in futures was aided slightly by better-than-expected net US upland cotton sales in the weekly US Department of Agriculture export sales report. The USDA said US net upland cotton sales reached 1,40,000 running bales (RBs, 500-lb each), higher than market expectations. Last week, sales stood at 37.800 RBs.

The active December contract moved in our expected lines testing near-term support levels. Prices found resistance near the 50c level, which is also the falling channel resistance point. We can now expect a test of 44.50c and if it does not hold there, then December contract has the potential to even extend towards the recent low of 42.35c. Cotton futures found it difficult to cross the important resistance at 56c, which is the long-term falling channel resistance level as seen in the chart above.

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 46.10c.

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 close to 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 have gone below the zero line in the indicator suggesting bearishness. Only a cross-over of the averages above the zero line in the indicator will suggest a bullish reversal now. Current prices are below the short- term average of 8 day EMA at 49.08c and the 34-day EMA is at 49.55c cents. Look for prices to test the support levels. Supports, at 46.30, 45.25 & 44.50c. Resistances, at 47.75, 48.25 & 49.50 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 of MCX. This analysis is based on the historical price movements and there is risk of loss in trading. He can be reached at Technical Analysis | Cotton

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