The Hindu Business Line : Cotton may head lower

NEW York cotton futures finished higher on Friday on speculative buying with market participants keeping an eye on various factors at play presently. One would be the resolution in the textile dispute between the US and China and the impact of the revaluation of the yuan by the largest consumer of cotton. The other would be the demand for the up coming 2005-06 marketing year(August-July) for the maturing crop in the US and China. The impact of the currency revaluation by China and the effect on cotton futures is expected to be meagre. Though Chinese importers will be benefited by the revaluation, it would lose that advantage while selling its finished products in dollars.

According to the US Department of Agriculture, China has bought 4.144 million running bales (RBs, 500-lbs each) of upland cotton as of July 14, down from 4.863 million RBs from the same time last year.

The active December contract pulled back higher as per our expectations. Any pullbacks to 53.50-54 cents levels will be strongly resisted now. Important support is at 49.15 cents, and we saw cotton futures bouncing higher from this level this week. Daily close below this level will take prices lower towards 46.40 cents another crucial long-term trend line support point as seen in the chart above. However, a daily close below 54.20 cents will negate our bearish expectations.

Elliot wave analysis points to a corrective A-B-C pattern, ending at 41.71cents 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 presently. A daily close below 46 cents will negate this possibility.

RSI is in the neutral zone indicating that it is neither overbought nor oversold. The averages, in MACD have gone below the zero line in the indicator suggesting bearishness. Only a crossover of the averages above the zero line in the indicator again will trigger a bullish reversal.

Current prices are above the short-term average of 8-day EMA at 51.32 cents and the 34-day EMA is at 52.18 cents. Look for cotton futures to test the resistance levels and then head lower.

Supports are, at 51.25, 50.65 and 49.10 cents. Resistances at 52.72, 53.85 and 55.25 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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