The Hindu Business Line : Upward tweak seen in cotton

NYCE cotton futures closed firmer on Friday, pulling back from life-time lows. Early speculative sales took the market down to its lows, where the trade buying emerged to lead fibre contracts on its way up.

The market has been hit by near ideal growing weather across the US cotton belt. Ideal growing weather in the US cotton belt and expectations of large crops in other countries has been battering the cotton market, with trade and speculative accounts aggressively selling fibre contracts. The US Food and Agricultural Policy Research Institute said the US farmers would likely harvest 18.8 million (480-lb) bales of cotton, the fifth largest crop on record. Market participants will now closely watch the USDA supply/demand report due on August 12.

The weekly export sales report from the USDA was construed as bearish. USDA said the combined US net upland cotton sales reached 1,17,900 running bales (RBs, 500-lbs each), sharply below expectations. Shipments stood at 275,600 RBs. Total U.S. cotton exports stood at 12.907 million RBs. The active December contract moved lower as per expectations testing the important support levels. Resistance will be seen at 45.20c and a break higher should see cotton futures move up and test 46c from where the recent decline began. There are signs of an up ward reversal from here and a close above 49c will confirm this eventuality in the coming sessions. This will probably end the bearish cycle for cotton and a possible recovery can be seen from there. 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 that wave "C" is currently underway.

As mentioned in the earlier update, we are possibly in the last leg of decline. The coming week will throw clues for a beginning of a new impulse. RSI is now in the heavily oversold zone indicating a correction upwards to occur in the coming week. It is also showing a positive divergence, where prices are making a new low which is not confirmed by a new low in the indicator. 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.

MACD is also showing a positive divergence which is an important reason for an upward bias. Current prices are below the short- term average of the 8-day EMA at 45.41c and the 34-day EMA is at 49.75c cents. Look for prices to retrace higher. Resistances, at 45.50, 46 & 48.50c. Supports, at 44, 43.50 & 42.80cents 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. He can be reached at gnanasekar_thiagarajan@yahoo.com.)

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