The Hindu Business Line : Bearish reversal likely in NY cotton

NEW York cotton futures ended marginally higher in subdued dealings ahead of a holiday weekend. The cotton market will be closed Monday for US Memorial Day. Markets were also in switch mode transferring positions from front July to the new crop December cotton. Fundamentally, most players are keeping tabs on the development of the cotton crop in the US and in other places such as China.

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 is expected to underpin prices and strong global demand is encouraging as per the USDA data released last week. The US Department of Agriculture's weekly export sales report showed a total US cotton sales at 4,62,500 running bales (RBs, 500-lbs each), above market expectations. Chinese purchases alone were pegged at 2,17,300 RBs. The Active July contract is seen consolidating in a narrow range. Support was seen at 49.80 c but the bounce from there has not been impressive and, therefore, there could be further scope of downside in short-term. Major support is at 49.01 c being the fibonnaci 61.8% retracement level for the move from 41.71 c to 60.50 c.

Believe the current move to be corrective in nature and as long as 48 c contains the downside, look for cotton futures to consolidate and head higher. We expect cotton futures find an intermediate bottom between 48-49 c 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 c 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 neutral zone indicating that it is neither overbought nor oversold. The averages, in MACD are 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 50.83 c and the 34-day EMA is at 52.68 cents. Look for cotton futures to edge lower initially and then subsequently rise higher. Supports are, at 49.02, 48.41 & 47.67 c. Resistances, at 51.05 c, 52.50 c and 53.25 cents respectively.

(The author is associated with The Multi Commodity Exchange of India Ltd. The views expressed in this column are his own and not necessarily that of his employer. This analysis is based on historical price movements and there is risk of loss in trading. He can be reached at gnanasekar_thiagarajan@yahoo.com.)

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