The Hindu Business Line : Cotton futures seen heading lower

NYCE cotton futures closed higher on Friday, on massive trade buying coupled with the news of China buying rallying to a strong close after a three-day losing streak. The Chinese market participants who were out of the market for about a week due to the Lunar year festivities stepped in to the market with some aggressive purchases.

The National Cotton council released the annual survey on the US 2004 cotton plantings after the official business close. It said the cotton plantings in United States was likely to hit 14.76 million acres against 13.48 million acres last year. The report also said very high cotton future prices will encourage US farmers into planting more cotton in 2004.

The next important estimate for the U.S cotton industry will be the USDA's planting intentions report to be released on March 31. While the weekly USDA export sales report was disappointing because sales and shipments came in lower than expected, the focus for players quickly shifted to the trade and suspected Chinese buying.

Meanwhile, the Indian mills would see the drop in overseas cotton prices as an opportunity as the rise in the local prices have narrowed the price gap, which recently allowed traditional importer India to sell cotton abroad.

The active March contract fell against our expectations. The channel break point at 72.10 cents we identified was broken easily which led to this week's crash.

Resistance will now be seen at 72-cent levels. Looking at the daily chart in the longer picture, a possible head and shoulder pattern is seen, which is a very bearish indication. The neckline point comes at 69.10 cents. A weekly close below this level will set a bearish tone for cotton future prices in the months to come.

Another important and major support now lies between 63-65 cents. A gap which, was seen at 71.25 cents when it broke it higher earlier, has been filled as these gaps have the tendency to be filled on its way down. The wave counts, which we were looking at for the past several weeks, will now need to be reviewed. The move from the peak at 84.25 to 65 cents is possibly a corrective wave A and the subsequent pullback to 76.20 cents is a wave B. The current move should be a wave C targeting close to 58 cents.

RSI is in the oversold zone indicating a minor correction to take place. The averages, in MACD have again gone below the zero line in the indicator convincingly indicating that the trend could turn very bearish from here. Current prices are lower than the short-term average of 9-day EMA at 73.58 cents and the 50-day EMA is at 72 cents. Look for prices to head lower. Resistances at, 72, 73.60 and 76.20 cents. Supports at 69.80, 67.75 and 65 cents respectively.

(The author is a trader with Scotiabank and the views expressed by him are his own and not necessarily that of his employer. This analysis is based on the historical prices movements and there is risk of loss in trading.)

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