The Hindu Business Line : Bullish undertone in NY cotton

NEW York cotton futures ended marginally lower on Friday on trade and producer selling, which was mostly offset by steady speculative buying by funds. Investment funds have been bullish on soft commodities as a whole in 2006, which did not participate in the overall commodity rally seen in 2005.

And then there is China, the world's top consumer. The deficit in Chinese cotton crop has seen it importing 6.7 million bales in the first five months. News that the US was ending the Step 2 subsidy program for cotton may be bullish because it could cut cotton supplies at a time when consumption was strengthening considerably, especially from China.

Part of the inspiration behind the surge in cotton stemmed from the US Department of Agriculture's weekly export sales report. USDA said the total US upland cotton sales hit 450,500 running bales (RBs, 500-lbs each), up sharply from last week's 321,100 RBs. China was the top buyer with 242,100 RBs.

The active March contract rose higher in line with our expectations after correcting lower. Supports at 54 cents held well for a break of the trend line resistance at 56.45 cents. Important support will now be at 56.25-30 cent levels. We have been bullish on cotton futures for the past few months, as the bigger picture weekly charts shows a bullish triangle pattern in the making. A potential technical target falls at 68-70 cents for cotton futures in the months to come. However, psychological resistance will be noticed at the 60 cents level initially.

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 now looks to have begun the big impulsive third wave move, which we have been expecting for a while. 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 56.33 cents and the 34-day EMA is at 55.23 cents. Therefore, look for cotton futures to the test the resistance levels.

Supports are at 56.25, 55.40 & 54 cents. Resistances at 57.80, 58.25 & 60 cents respectively.

(The author is in the advisory panel of Multi Commodity Exchange of India Ltd (MCX). The views expressed in this column are his own and not that of MCX. 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.)