The Hindu Business Line : Downward correction likely

NYCE cotton futures finished modestly lower in thin volumes ahead of a holiday weekend. Speculative buying lifted fibre contracts to a two-and-half-month peak recently, which was more of a technically inspired rally although the broad fundamentals remains bearish, such as high US production and a supply surplus.

Fibre contracts are also being helped by strong exports lately. Though fundamental outlook for cotton is dominated by record crops in the US and in other countries such as China, heavier fibre demand is seen helping to absorb the large amounts of cotton being harvested around the world. This is clearly visible from the USDA weekly export sales data released till now.

USDA said US cotton sales this week hit 261,700 running bales much higher than market expectations. The US Department of Agriculture raised its US export figure in its latest supply and demand report to 12.7 million bales, from 12.5 million bales. As mentioned before market participants will have to contend with a record US and world cotton output as estimated by the USDA earlier this month.

The active March contract is consolidating with good support seen at the 45c levels. As mentioned earlier, important resistance at 45c was broken and a daily close above 46c is now expected to see a short-term rise towards 49-50c also being a long-term falling channel resistance point and the 200-day EMA point, as seen in the chart above. We can now expect a test of the long-term falling channel resistance at 48.65c as long as 45c holds. Support has held till now on the lower side of the range at 41-42c levels. Crucial support is at 41c a low made on 2002.

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. A new impulse might have begun, but we would like to wait for confirmation of the same. Only a daily close above 55c will confirm that we have begun a new impulse. RSI is in the neutral zone now indicating that it is neither overbought nor oversold.

The averages, in MACD are above the zero line in the indicator suggesting bullishness. Only a crossover of the averages below the zero line in the indicator will suggest a bearish reversal now. As mentioned before positive divergence is noticed in both the indicators which makes us believe that we could see a bullish reversal. Current prices are above the short-term average of the 8-day EMA at 45.90c and the 34-day EMA is at 44.75 cents. Look for prices to test the resistance levels and then correct lower.

Supports, at 44.78, 43.50 & 42.85 Resistances, at 46.50, 47.20 & 48.65 cents respectively.

(The author is associated with the Multi Commodity Exchange of India. The views expressed in this column are his own and not 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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