The Hindu Business Line : Downward trend likely in cotton

NEW York cotton futures ended lower on Friday at a four-week low on speculative profit-taking. The downfall could be attributed mostly to a resurgent dollar. The CRB-Reuters Commodity Index contributed to the sell-off in fibre contracts. Fund selling was seen in all the commodities as the dollar strengthened across the board.

Markets will also keep an eye on China's demand going in to the 2005-06 marketing year. There was little reaction to the monthly USDA supply-demand report. USDA said world cotton consumption in the 2005-06 marketing year(August) will reach 111.5 million (480-lb) bales while output totalled to 107 million bales. Chinese imports in 2005-06 were pegged at 15 million bales, higher than the 8 million bales in 2004-05. Weather from here on should be an important factor to monitor and assuming weather is average to normal, we could see cotton future prices come under pressure.

The Active July contract is struggling to cross the near-term top at 58 cents and a break of the rising trend channel and short-term moving averages shows clear signs of weakness in the contract. Prices could now edge lower towards 51.75 cents the fibonnaci 38.2 per cent retracement point for the move from 41.71cents-58 cents.

Cotton futures could even extend lower towards 49.80 cents and then find support from there. As long as 48 cents contains the downside, look for cotton futures to consolidate and head higher. Elliot wave analysis points to a corrective A-B-C pattern, ending at 41.71cents and a new impulse in progress. Negative divergences in the indicators are also an important reason for the sharp corrective fall in cotton futures, where prices were making a higher high not confirmed by a higher high in the indicator. Negative divergence is noticed in both the indicators, where prices are making a higher high not confirmed by a higher high in the indicator.

RSI is in the neutral zone indicating that it is neither overbought nor oversold. The averages, in MACD are still above the zero line in the indicator suggesting underlying bullishness. Only a crossover of the averages below the zero line in the indicator will suggest a bearish reversal. Current prices are above the short-term average of 8 day EMA at 54.94 cents and the 34-day EMA is at 54.02 cents. Look for cotton futures to correct lower and test the support levels.

Supports are at 53, 51.75 and 49.80 cents. Resistances at 54.95 cents, 56 and 58.75 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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