The Hindu Business Line : Cotton to test support levels

NYCE cotton futures finished lower on long liquidation and follow-through selling from Thursday's crash, after hitting a 14-week high recently. Markets were awaiting a report on planting intentions from the National Cotton council on Friday, which came finally after the market close. Cotton plantings in 2005 have been pegged at 13.734 million acres slightly below market expectations. Speculative buying lifted fibre contracts higher recently, which was more of a technically inspired rally although the broad fundamentals remain bearish, such as high US production and a supply surplus.

Though fundamental outlook for cotton is dominated by record crops in the US and in other countries like 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 hit 285,300 running bales (RBs, 500-lbs each), sharply above market expectations.

The active March contract headed lower as expected. We saw a test of 48.31 cents being the long-term falling channel resistance point. A sharp fall from there, broke all key support levels and cotton futures tumbled lower. Support has held till now at 41-42 cents level a low made on 2002. As mentioned in the previous update, failure to hold support at 45 cents can take fibre contracts back to recent lows. One more pullback to 45 cents can be expected before a sharp fall.

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. The corrective pattern continues and the impulse we anticipated did not materialise. Only a daily close above 55 cents will confirm that we have begun a new impulse.

RSI is in the neutral zone now indicating that it is neither overbought nor oversold. It is showing a negative divergence, where prices are making a higher high not confirmed by a higher high in the indicator. The averages, in MACD are still 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.

Current prices are above the short-term average of 8 day EMA at 45.50 cents and the 34-day EMA is at 45.30 cents. Look for prices to test the support levels. Supports, at 42.80, 41.71 and 40 cents Resistances at 44.78, 45.25 and 46.70 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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