The Hindu Business Line : Cotton may dip, then rise

NEW York cotton futures ended marginally lower on Friday after bouncing from a fresh 3-month low on the back of speculative covering, steady export demand and supportive option buying.

A resurgent dollar kept the pressure on prices. Markets are still keeping a close watch on the 2005-06 crop plantings. On the demand side Chinese imports in 2005-06 were pegged at 15 million bales, higher than the 8 million bales in 2004-05.

Continued Chinese demand will underpin prices and strong global demand is encouraging as seen in the USDA data released on Thursday.

US Cotton sales for the week reached 3,64,400( 500-lb) running bales, compared with the previous week's 55,000 RB's.

The Active July contract tanked lower and tested some of the crucial near-term support levels. As mentioned in the previous week's update, Cotton futures could 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.

We expect cotton futures find an intermediate bottom between 48-49 cents in the coming week and then rise higher from there. Elliot wave analysis points to a corrective A-B-C pattern, ending at 41.71 cents and a new impulse in progress. Negative divergence is noticed in both the indicators, was an important factor for the recent fall in prices.

RSI is in the oversold zone indicating a correction to take place. The averages, in MACD have gone below the zero line in the indicator indicating a bearish reversal. Only a crossover of the averages below the zero line in the indicator will suggest a bearish reversal.

Current prices are below the short-term average of 8 day EMA at 54.93 cents and the 34-day EMA is at 53.68 cents.

Look for cotton futures to edge lower initially and then pullback higher again.

Supports are, at 49.80, 48.41 and 47.67 cents. Resistances at 51.56, 53.25 and 55 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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