The Hindu Business Line : Cotton futures may head higher

NEW York cotton futures ended higher on Friday on late speculative buying after initially being depressed by a weak export sales data from the USDA hitting a marketing year low.

USDA said US cotton sales hit a marketing year low of 42,000 running bales, way below market expectations. While the monthly USDA report could be seen as bearish due to abundant supplies in the coming months, production losses in China the largest producer and consumer will keep prices buoyant.

USDA cut its forecast for Chinese cotton production in 2005/06 to 24.5 million (480-lb) bales from 25.5 million last month. It upped world cotton consumption to 112.93 million bales from 112.20 million last month.

US global cotton exports are expected to increase 1.6 million bales, or 11 per cent, according to USDA figures.

Market players were digesting news that talks to resolve a textile dispute between the US and China had broken down and that American manufacturers were asking for more curbs on the imports from the Asian giant.

The active December contract rose higher in line with our expectations. Good resistance will be seen at 57-58 cents levels.

Prices could now correct lower towards 53-54 cents levels on the back of indicators entering the overbought territory. Near-term support is at 55.08 cents followed by the important rising trend line support at 54.05 cents.

Prices have broken the key resistance at 53 cents triggering bullishness. As long as these support points hold the downside, look for cotton futures to rise higher in the coming weeks towards 60 cents or even higher.

However, an unexpected move below the 51.54 cents also being the 200-day EMA level, can cast doubts on our bullish view. Favoured view is to look for cotton futures to head higher after a corrective dip lower.

Elliot wave analysis points to a corrective pattern in progress, ending at 41.71 cents and a new impulse still in progress. The corrective second wave of that impulse looks to have ended at 46.10 cents. RSI is in the overbought zone indicating a correction lower to take place.

The averages in MACD are above the zero line in the indicator suggesting bullishness to be intact. Current prices are above the short-term average of 8-day EMA at 55.40 cents and the 34-day EMA is at 53.10 cents.

Therefore, look for cotton futures to correct lower and then rise higher again.

Supports are at 55.08, 54.25 & 52.75 cents. Resistances at 57.50, 58.25 & 60.57 cents respectively.

(The author is associated with the Multi Commodity Exchange of India Ltd (MCX). 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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