The Hindu Business Line : Downward tweak in cotton

NYCE cotton futures finished lower on Friday on speculative sales on the back of follow-through pressure as stop losses were triggered on the downside. Cotton futures recovered from their recent lows due to profit-taking and short covering, but could not sustain the momentum.

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. China could be the only saviour for cotton fundamentally. According to the US Department of Agriculture's monthly production report last month, China is seen consuming 36 million (480-lb) bales of cotton, versus production of 29.5 million bales.

The active March contract fell lower in line with our expectations. As mentioned in our previous update, a corrective pullback can be expected towards 45c levels and resistance will be strong at this level. Prices tested a high of 44.78c before crashing to a near-term low of 42c on Friday. Next important support is at 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 are 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 43.42c and the 34-day EMA is at 44.38 cents. Look for prices to head lower and test the support levels. Supports, at 42, 41.00 & 39.75. Resistances, at 43.42, 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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