The Hindu Business Line : Cotton futures may drift lower

NYCE cotton futures finished marginally lower on Friday in a choppy trade, as the markets were range-bound waiting for a clear direction from here. Most market participants were on the sidelines waiting for release of a key government report next week.

The monthly US Department of Agriculture supply/demand report, is due out on Tuesday. The report contains the latest updates on world cotton production and consumption. Recent storms in the southeastern United States will likely prompt the USDA to trim its estimate for the US cotton output in 2004-05 to around 20.31 million (480-lb) bales.

Futures got buoyed lately as heavy showers drenched Texas, the top cotton growing area of the country. The harvest is just beginning to gather steam in large parts of the US cotton belt. Rains in Texas would not be welcome because the cotton bolls are open and the moisture would delay harvesting, reduce yields and harm cotton quality. A record US cotton crop and large crops in other countries are however, keeping futures on the defensive.

The active December contract is moving in a tight range. Good resistance will be seen at the psychological resistance point at 50c. Prices are moving in a narrow range between 46c and 49c presently. A daily close below 46c can see cotton futures heading towards 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. However, if prices break the 49c-level on the up side, then we can expect it to test the psychological resistance at 50c followed by crucial resistance at 51.75-52 cents. The potential to rally higher from there looks very unlikely as the bigger picture looks very bearish. Preferred view is to look for prices to head lower. 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.

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 crossover 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 47.54c and the 34-day EMA is at 48.60 cents. Look for prices to test the support levels. Supports at 46.00, 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 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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