The Hindu Business Line : Cotton likely to test resistance levels

NEW York cotton futures ended firmly higher on Friday on fresh speculative buying on a positive backdrop provided by the weekly export sales figures released by the USDA.

USDA showed total US upland cotton sales amounted to 333,800 running bales (RBs, 500-lbs each), from sales last week of 140,800 RBs. China was the top buyer with 195,200 RBs. Weather worries have also started reflecting on the prices with the possibility of a drought hitting Texas, the top cotton growing State in the country. Energy prices hovering near the recent highs will also underpin cotton futures, as it enjoys a price advantage compared to the petrochemical-based fibres.

USDA earlier said that US cotton production in 2005/06 rose marginally to 23.72 million (480-lb) bales from 23.70 million last month. The estimates for Chinese production, imports and consumption were left unchanged at 24.5, 16.5 and 43 million bales, respectively.

The now active March contract tested the resistance levels in line with our expectations. Prices have closed above the trend line resistance point at 56.45 cents, which is a very bullish sign. As mentioned earlier, the bigger picture weekly charts continue to show a bullish triangle pattern in the making. Prices could now potentially target 57.80 cents a near-term resistance followed by the important resistance at 60.50 cents. Subsequently, a retracement to 53.50-54 cents looks likely, from where it is expected to consolidate and 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. It is possible a big impulsive third wave move to happen from here. RSI is in the neutral zone indicating that it is neither overbought nor oversold.

The averages in MACD are 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 55.65 cents and the 34-day EMA is at 54.38 cents. Therefore, look for cotton futures to the test the resistance levels and correct lower subsequently.

Supports are at 56.01, 55.45 & 54.80 cents. Resistances at 57.80, 58.25 & 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 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.)

Gnanasekar T.