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Monday, Oct 14, 2002

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Columns - Technical Analysis

Cotton futures to move up

Gnanasekar T.

NYCE cotton futures finished lower on Friday on speculative and fund pressure due to a bearish USDA monthly production report. In its October supply-demand data, USDA raised world cotton ending stocks to 39.83 million (480-lb) bales, from 39.16 million last month.

A widely anticipated reduction in US ending stocks failed to materialise and showed a slight rise to 6.8 million bales from 6.7 million. US cotton exports were also lowered to 11 million bales from last month's forecast of 11.2 million. However, cotton players opted to hold back from taking aggressive positions in the market after the USDA said it has not yet tabulated the losses inflicted by tropical storm Isidore and hurricane Lili when they slammed into the US Gulf Coast a few weeks ago.

The market also took note of news that the Chief Executive of Dunavant Enterprises, Mr William Dunavant Jr., said in a forum after release of the USDA data that cotton prices will likely trade between 42 and 47 cents through the end of 2002. He also said consumer confidence has been savaged by the attacks of September 2001, which spawned a recession in the US.

In another news, the New York Board of Trade weekly spec-hedge report showed the funds with a net long position of 9.3 per cent, compared with a net long position of 13.2 per cent in last week's report. The active contract December fell lower again after making highs this week. A clear range has been set, which can be noticed in the channel seen in the chart.

Support for the channel is now at 41.31c on the downside and resistance at 44.70c. The crucial support at 42.50c held and a break of this will give way for as test of 41.31c on the downside. A channel break downwards will be a very bearish signal for cotton in the medium term to long term. The Fibonacci retracement targets of 61.8 per cent also lie at the 41 cents levels at the lower end of the channel.

Using Elliot wave analysis, it is still unclear on whether the correction, we have been talking about earlier in the bigger picture is complete or not. More insights into the wave count can be had after watching if prices hold well at the 40c range. RSI is still in the neutral zone indicating that it is neither overbought nor oversold. A positive divergence is noticed in RSI where prices are making a new low, which is not confirmed by a new low in the indicator. This can result in a pull back up wards next week.

The averages in MACD however, continue to be below the zero line in the indicator and as long as it stays there, hopes of an up ward reversal can be kept aside for some time. Current prices are way below the short and long term averages of 9 and 50 days EMA respectively. Look for prices to correct upwards. Supports at 42.50,41.31 &38.92 cents. Resistances at 43.16, 44.20 & 45.35 cents.

(The author is a Chennai-based technical analyst who tracks the international commodities futures markets. This analysis is based on historical price movement of the commodity concerned. There is risk of loss in trading.)

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