The Hindu Business Line : Bearish trend in NY cotton futures

NEW York cotton futures ended lower as the markets are in a 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.

Weather is the key now and any disturbance there will have an effect on prices. Market participants will be looking for news of purchases by China, the world's biggest producer and consumer of cotton.

There was a little reaction to the US Department of Agriculture's weekly export sales data. The USDA said the US cotton sales amounted to 1,42,300 (500-lb.) running bales (RBs), sharply down from sales last week of 4,62,500 RBs.

In a special report, the USDA's Economic Research Service estimated that in the 2005/06 cotton marketing year, India is expected to harvest 19 million bales of cotton and import about 7,00,000 bales.

Currently, India imports cotton to supply its textile industry, the world's second-largest behind China, because of low crop yields and poor quality.

The Active July contract is seen sliding further due to switch and liquidation pressure. Important support at 49.01c has been broken indicating bearishness.

However, indicators are in heavily oversold territory, which makes us believe we could see a corrective rebound in the coming week.

Resistance will be seen at 50.89c being the 200-day EMA level or possibly higher towards the trend channel resistance point at 51.05c.

Believe the current move to be corrective in nature and as long as 48c contains the downside, look for cotton futures to consolidate and head higher. We expect cotton futures find an intermediate bottom between 48-49c in the coming week and then rise higher from there.

Elliot wave analysis points to a corrective A-B-C pattern, ending at 41.71c 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 are below the zero line in the indicator indicating bearishness. Only a crossover of the averages below the zero line in the indicator will suggest a bullish reversal.

Current prices are below the short-term average of 8 day EMA at 49.39c and the 34-day EMA is at 51.81 cents. Look for cotton futures to correct higher.

Supports are, at 48.05, 47.67 & 46.97c. Resistances, at 49.01, 50.89 & 51.05 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 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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