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Cotton futures surged higher on speculative buying ahead of a crucial Government report on demand/supply. The US Agriculture Department will release its monthly supply/demand data on Tuesday. The USDA is expected to raise its estimate of the US 2007/08 cotton harvest after ideal growing weather in the prime growing State of Texas among others. Markets are also worried that a global credit crunch, surging crude prices and attempts by top consumer China to curb inflation may conspire to undermine world cotton demand. Despite the questions over demand and China, the longer-term outlook for cotton remains promising because US cotton acreage in 2008 is expected to go down given robust prices for wheat, corn and soybeans.

Active March cotton futures contract rose sharply higher in line with our expectations. As seen in the chart above, a bullish pattern in the making. Break above 65.85 cents will confirm the bullish trend, which can possibly target 75 cents on the upside. Crucial support is at 59 cents and as long as this level holds support, we can expect prices to consolidate and rise higher again. Our favoured view expects cotton futures to find support in the 61 cents region failing which we could visit 59 cents and then resume the climb higher again.

This zone is also the breakout point which spurred a huge rally in cotton futures past three months. Elliot wave counts indicate a third wave impulse in progress. After this correction ends, we can expect the impulse to continue higher. Indicators are displaying a neutral picture.

RSI is in the neutral zone indicating that it is neither overbought nor oversold. The averages in MACD are still above the zero line of the indicator indicating bullishness to be intact. Therefore, look for cotton futures to rise higher.

Supports are at 63.10, 61.25 & 59 cents and resistance are at 66.10, 67.50 & 69.00 cents.

Gnanasekar T.

(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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