The Hindu Business Line : Cotton may test resistance levels

NYCE cotton futures finished marginally lower on Friday as market participants completed rolling positions out of December contract before the first notice day on November 22.

Trade buying emerged during the close to support cotton futures and this is viewed as a positive sign by the markets. The exchange will remain closed next weekend due to US Thanksgiving day holidays. Markets were also buoyed by the USDA's weekly export sales report which showed total US cotton sales at 265,700 running bales( RBs, 500 pounds each) way above market expectations.

Market participants, however, will have to contend with a record US and world cotton output as estimated by the USDA earlier. The USDA's monthly supply report raised its forecast for the 2004-05 US cotton crop to a record 22.54 million (480-lb) bales from its estimate of 21.54 million bales last month.

World cotton production was increased to 111.72 million bales, from 109.67 million last month, consumption climbed to 102.93 million from 101.4 million, and world ending stocks surged to 44.55 million versus 41.95 million. The active March contract recovered from its recent lows on a technical pullback.

Cotton futures retraced higher in line with our expectations. As mentioned in our previous update, a corrective pullback can be expected towards 45 cents levels. Resistance will be strong at this level. Important support is at 41cents a low made on 2002. The potential to rally higher looks very unlikely as the bigger picture still looks bearish. A clear bullish reversal will be confirmed on a daily close above 49 cents. Till then, we will continue to hold our bearish view. The long term falling channel support point is close to 37.50 cents. Though it is not clear now, if we could see a test of this level, there is potential for cotton futures to head till there. 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 50 cents 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. Positive divergences seen in the indicators, was the main reason for a corrective pullback, though the underlying trend is down.

Current prices are below the short-term average of 8-day EMA at 43.03 cents and the 34-day EMA is at 44.84 cents. Look for prices to consolidate and test the resistance levels. Supports at 42.50, 41 and 39.75. Resistances at 43.80, 44.50 and 46.25 cents respectively.

(The author is associated with the Multi Commodity Exchange of India. 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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