The Hindu Business Line : Cotton to test support level

NEW YORK cotton futures finished lower Friday on speculative profit taking, ahead of a long weekend. The cotton market will be closed on Monday for US Independence Day.

Though cotton futures have risen sharply on local weather developments, crop developments in China, which is the world's top producer and consumer of cotton, will have to be monitored closely. Any aberrations there could have a sentimental effect for the start of the 2005/06 marketing year (August/July). With China having less carryover stocks and weather problems in cotton farms, production is expected to be less than the demand.

Meanwhile, the International Cotton Advisory Committee has said China's imports could more than double during 2005/06, climbing to 2.8 million tonnes. ICAC said in its monthly outlook that world cotton consumption would slightly exceed production. It said cotton production would fall below 24 million tonnes in 2005/06, down 2.4 million tonnes, while consumption is seen reaching 23.8 million tonnes.

The active December contract moved in line with our expectations. Important resistance is seen at 57.74 cents. Trend line resistance will be strong between 57-58 cents on the upside. However, the recent rally has been quite sharp and indicators have moved into heavily overbought territories signalling a possibility of good profit taking and correction lower in the coming week.

Important support level to watch out for in the coming week is at 53.71 cents, the horizontal trend line point and a crucial fractal bottom. A daily close above 58 cents will signal clear bullishness in cotton futures. The favoured view is to expect a correction lower towards 53.70-cent levels and then rise higher.

Elliot wave analysis points to a corrective A-B-C pattern, ending at 41.71 cents and a new impulse in progress. The second wave of that impulse looks to have ended at 46.10 cents. We could possibly be in the third wave of the impulse currently. RSI is in the heavily overbought zone indicating a correction to take place.

The averages, in MACD, are 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 54.63 cents and the 34-day EMA is at 52.09 cents. Look for cotton futures to test the support levels and then higher again.

Supports are at 55, 53.70 and 52.65 cents. Resistances at 57.15, 58.25 and 60.50 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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