The Hindu Business Line : Cotton futures may head lower

NYCE cotton futures finished marginally higher as the week was mostly dominated by switch trading, transferring positions out of the front month contract. Even strong export sales data from the USDA failed to provide the necessary momentum. USDA said US cotton sales surged to 4,06,800 running bales (RBs, 500-lbs each), sharply higher than market expectations. China, the world's biggest cotton consumer, accounted for sales of 1,31,800 RBs. 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.

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. The recent strength in the dollar has also dampened sentiment in the commodities market as US exporters realise lesser revenues against their exports.

The active March contract is lower in line with our expectations. Cotton futures fell lower after failing to cross the near-term resistance at 45 cents. 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. Prices are now expected to move in a range and edge lower towards 41cents or even lower towards 38 cents.

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 materialize. 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 have gone below the zero line in the indicator suggesting bullishness. Only a crossover of the averages above 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 44.10 cents and the 34-day EMA is at 44.87 cents. Look for prices to head lower.

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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