The Hindu Business Line : Cotton futures may drift lower

NYCE cotton futures finished lower on Wednesday on thin volumes ahead of a long weekend. The exchange will remain closed this weekend due to US Thanksgiving days holidays.

Trade buying has been supporting cotton futures from surging lower. Cotton futures recovered from their recent lows due to profit-taking and short covering, but could not sustain the momentum. After the holiday break, market participants 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 retraced higher in line with our expectations. As mentioned in our previous update, a corrective pullback can be expected towards 45c levels. Resistance will be strong at this level. Near-term support is at 42.50c followed by 41c, 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 49c. Till then, we will continue to hold our bearish view.

The long term falling channel support point is close to 37.50c. 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 50c 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 43.31c and the 34-day EMA is at 44.62 cents. Look for prices to test the support levels. Supports, at 42.50, 41.00 & 39.75. Resistances, at 43.80, 44.50 & 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 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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