The Hindu Business Line : Cotton may bounce before falling

NEW York cotton futures ended firmer on Friday as the markets continued to switch positions from front July to the new crop December cotton. The monthly supply-demand data from the USDA was interpreted as bullish for cotton futures. USDA estimated world cotton production in 2005-06 (August-July) being reduced to 106.19 million (480-lb) bales, from 107 million last month.

World consumption was upped slightly to 111.53 million, versus 111.50 million. U.S. cotton exports in 2005/06 increased to a record 15 million bales, from 14.5 million in last month's data, the USDA said. Fundamentally, most players are keeping tabs on the development of the cotton crop in the US and in other places like China. The tropical storm Arlene expected to hit the cotton-growing areas caused little worries to the market since it is early in the season and any winds will not hit plants that are still in or close to the ground.

The Active July contract slid further due to switch and liquidation pressure. Important support at 46 cents held well and a pullback is seen from there on the back of indicators lying in heavily oversold territory.

Resistance will be seen at 49.58 cents followed by stronger resistance at 50.75 cents being the 200-day EMA level. Our view of an intermediate bottom between 48-49 cents has gone awry. Prices have tanked lower and a daily close below 48.31cents has opened the downside for cotton futures to 44.78 cents immediately or even lower.

A corrective bounce higher towards 48.31-49.05 cents looks likely before the fall. Elliot wave analysis points to a corrective A-B-C pattern, ending at 41.71cents and a new impulse in progress.

RSI is in the heavily 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 47.55 cents and the 34-day EMA is at 50.55 cents. Look for cotton futures to correct higher initially and then fall lower again.

Supports are, at 46.15, 45.71 and 44.8 cents. Resistances at 48.31, 50.89 and 51.05 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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