The Hindu Business Line : Cotton to test support levels

Trading was mostly subdued during the week due to the union strike and approaching Christmas holidays. Earlier in the week, fibre contracts rose higher on strong export sales as released by the US Department of Agriculture on Thursday, once again confirming robust demand despite the prospects of a huge crop.

The US Department of Agriculture released its weekly export sales report on Thursday showing net upland sales of 293,000 running bales within market expectations. In other news, China sharply raised the official size of its economy on Tuesday after taking into account emerging service industries, saying its output last year was 16.8 per cent higher than previously reported. The strengthening of its economy is expected to result in increased consumption of apparels.

The now active March contract rose higher as expected, but met with good profit-taking at higher levels. Activity will be thin in the coming week due to the Christmas holidays. No change in view. As mentioned earlier, the bigger picture weekly charts continue to show a bullish triangle pattern in the making and, therefore, it is difficult for prices to fall lower sharply.

Break above 54.25 cents can trigger a rally higher towards the trend line resistance point at 55-56 cent levels. As long as price stays above 50.75-51 cent levels, expect cotton futures to rise higher again. Only a daily close below 48.25 cents will signal bearishness in cotton futures.

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. Daily close below 48.25 cents will change this outlook and lead to a sharp fall lower. RSI is in the neutral zone indicating that it is neither overbought nor oversold.

The averages in MACD have gone above the zero line in the indicator suggesting a bullish reversal in the bigger picture. Current prices are above the short-term average of 8-day EMA at 53.38 cents and the 34-day EMA is at 52.86 cents. Therefore, look for cotton futures to test the support levels and rise higher.

Supports are at 53.10, 52.50 and 50.25 cents. Resistances at 54.25, 55 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 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.)