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Cotton futures ended higher on Friday on speculation, supported by a strong rally in crude oil futures and the USDA demand/supply outlook, giving further boost to fibre contracts.

The USDA said that the world cotton production in 2008-09 will reach 118 million (480-lb) bales, compared with 120.47 million in 2007-08. It said that the world consumption was pegged at 127 million bales versus 124.43 million, and ending stocks were cut to 55.55 million bales against 61.55 million bales in 2007-08. The US cotton production is projected to drop 25 per cent in 2008-09 at 14.5 million bales, after plantings slumped to the lowest levels in 25 years, the USDA said.

Active July cotton futures contract corrected higher as per our expectations. Rallies to 72-74 cents could find strong resistance in the coming sessions. Only a direct rise above 76 cents will turn the picture bullish and there even exist a possibility of prices rallying to 84 cents subsequently. An important trend line resistance is at 72.50 cents now.

In the near-term, we can expect a rally towards 76 cents, however, the head-and-shoulder pattern is in the making and, therefore, we expect bearishness to set in with a possibility to test 60 cents on the downside.

The big picture counts still are giving mixed signals and would, therefore, prefer to watch the prices for more clues. Indicators are displaying a neutral picture.

The RSI is in the highly-oversold zone, indicating a possible upward correction in the coming week.

The averages in MACD have gone below the zero line of the indicator, indicating a bearish reversal.

Therefore, look for cotton futures to test the support levels and correct higher subsequently.

Supports are at 70.54, 69.10 & 67.75 cents and resistances are at 73.25, 74.50 & 76 cents respectively.

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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