The Hindu Business Line : Bullish reversal likely in NY cotton

NEW York cotton futures finished higher on Friday hitting a six-week high on fund and trade buying triggered by concerns of weather in the cotton producing countries. News of the key growing area in the US, Texas affected by dry weather, sent the market higher this week. Market participants are keenly watching the weather developments in US and China, which is the world's top producer and consumer of cotton.

With China having less carryover stocks and weather problems in Chinese cotton farms, production is expected to be less than the demand. Reaction to the US Department of Agriculture's weekly export sales data was muted. The USDA said the US cotton sales amounted to 2,37,900 running bales at the higher end of the market expectations once again enhancing the view that demand continues to be strong.

The Active December contract rallied higher as per expectations. Important resistance is seen at 55c followed by 57.74c. Trend line resistance will be strong between 57-58c on the up side.

However, the recent rally has been quite sharp and indicators have moved into heavily overbought territories signaling a possibility of a good profit-taking and correction lower in the coming week. A daily close above 58c will signal clear bullishness in cotton futures.

Elliot wave analysis points to a corrective A-B-C pattern, ending at 41.71c and a new impulse in progress. The second wave of that impulse looks to have ended at 46.10c. We could possibly be in the third wave of the impulse presently.

RSI is in the heavily overbought zone indicating a correction to take place. The averages, in MACD have gone above the zero line in the indicator indicating a bullish reversal.

Only a crossover of the averages below the zero line in the indicator will suggest bearishness.

Current prices are above the short-term average of 8-day EMA at 52.16c and the 34-day EMA is at 50.94 cents. Look for cotton futures to correct lower initially and then rise higher again. Supports are, at 52.65c, 50.55c and 48.95c. Resistances at 55, 57c and 58.25 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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