The Hindu Business Line : Cotton seen heading lower

NYCE cotton futures finished lower on Friday on speculative selling as bearish fundamentals prevailing in the market. Weekly export figures released by the USDA fell short of markets expectations.

USDA said US net upland cotton sales hit 191,900 running bales and shipments of previously booked orders reached 103,800 RBs. Trade buying at the lows helped to erase some losses made during the day. Prices are now trapped in a range with no clear direction seen.

There is near term tightness in supply providing support for fiber contracts. A record US cotton crop and large crops in other countries are keeping futures on the defensive. In its monthly supply-demand report this week, the US Department of Agriculture forecast world cotton output in 2004-05 will hit 109.67 million (480-lb) bales from 107.25 million last month. US production was increased to a record 21.54 million bales from 20.9 million in last month's report. Markets were expecting USDA to reduce its estimate of U.S. cotton in light of the recent weather conditions in several cotton producing states. The active December contract is stuck in a broad range between 44-49 cents.

As mentioned earlier, prices tested the support levels near 43.75 cents bouncing from there, which looks more like a corrective pattern. A break of 44 cents on the downside again has the potential to test 42.50 cents or even lower. However, if prices break the 49 cents level on the up side then we can expect it to test the psychological resistance at 50 cents followed by crucial resistance at 51.75-52 cents.

The potential to rally higher from here looks very unlikely as the bigger picture still looks bearish. Preferred view is to look for prices to head lower. As we have been maintaining, 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. 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 46.46 cents and the 34-day EMA is at 47.59 cents. Look for prices to consolidate and head lower. Supports at 45.00, 44.50 and 43.25. Resistances at 46.70, 48.25 and 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. He can be reached at gnanasekar_thiagarajan@yahoo.com)

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