The Hindu Business Line : Cotton futures may head lower

New York cotton futures ended lower on Friday dominated mostly by switch trade from the spot month, which goes into delivery soon. Fundamentally, cotton is reeling with a bumper crop while consumption in the world, especially from leading user China, has been slack in the recent past.

The market will now look towards the US Agriculture Department's monthly supply/demand report to provide some clues on its next move. In other news, the International Cotton Advisory Committee (ICAC) said world cotton production in 2006/07 will rise to 25 million tonnes, up 330,000 tonnes from a year earlier, but supply is forecast to fall short of global consumption.

The active December contract corrected higher as per expectations but retreated lower subsequently. There are many signs of weakness presently. A test of the important support at 47.70 cents looks likely as long as prices stay below 50.75 cents.

As mentioned in the previous update, though we expected a correction higher, the underlying trend still remained bearish. Only a move above 53.10 cents will confirm a bullish reversal. The potential target for the downside is at 46.10 cents in the near-term.

Elliot wave analysis stills points to a corrective pattern in progress. A daily close below 48 cents will confirm the corrective pattern we have been tracking and will need to review the counts. RSI is in the neutral zone indicating that it is neither overbought nor oversold.

The averages, in MACD are below the zero line in the indicator suggesting bearishness. Only a crossover of the averages above the zero line again will indicate a bullish reversal. Current prices are below the short-term average of 8-day EMA at 49.37 cents indicating bearishness and the 34-day EMA is at 50.24 cents. Therefore, look for cotton futures to head lower.

Supports are at 48.45, 47.70 and 46.10 cents. Resistances are at 50.75, 51.50 and 52.85 cents respectively.

(The author is the Director of Commtrendz Research and also 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.)

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