The Hindu Business Line : Upward correction in cotton?

NYCE cotton futures closed lower on Friday, on speculative selling due to expectations of a large crop in the making both in the US and other growing countries.

Fundamentally, the market is looking at larger US cotton sowings in 2004/2005 in the range of 18-18.5 million (480-lb) followed by larger crops in other growing countries as well. In its June monthly supply/demand report, the US Department of Agriculture forecast the US crop at 17.6 million bales. Markets will eagerly look forward to the next USDA production report (on Monday).

The weekly USDA export sales report showed combined US upland cotton sales at 372,300 running bales (RBs, 500-lbs each), above market expectations, failing to inspire the market where the underlying negative sentiment is running strong against cotton futures. Only a return of the Chinese to the cotton markets will lift prices higher. Heavy purchases of US cotton last year by China propelled prices to their highest level since late 1995 with the then spot December cotton contract hitting a lifetime high above 84 cents.

The active December contract continues to move lower with no decent correction seen. Current move has failed to hold on to support at key levels leaving it vulnerable to test further lows. Most important support will be between 47.80-48c a long term horizontal trend line support point which has provided good support for cotton futures in the past and believe this will be a good support level to watch for in the next week. We have also discussed the head and shoulder pattern appearing in the month of March 2004 as seen in the above chart which has worked well. The target for this pattern is near 44c. Resistance will now be seen at the psychological 50c level. There might be a pullback higher and then a move lower below the current low to end this downtrend.

Elliot wave analysis points towards a complex corrective structure currently underway. The A-B-C correction started from the high of 82.95c, and therefore believe wave "C" is currently underway. RSI is now in the heavily oversold zone indicating a correction upwards to occur in the coming week. The averages, in MACD are still below the zero line in the indicator suggesting underlying bearishness. Only a cross over of the averages above the zero line will confirm a trend reversal. Current prices are below the short-term average of 8-day EMA at 50.03c and the 34-day EMA is at 54.65 cents. Look for prices to test the support levels. Resistances at 50.03, 52.50& 55c. Supports, at 48, 47.80 & 45 respectively.

(The author is associated with the Multi Commodity Exchange of India. The views expressed in this column are his own and not of his employer. This analysis is based on the historical price movements and there is risk of loss in trading.)

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Upward correction in cotton?