The Hindu Business Line : Downward tweak seen in cotton

NYCE cotton futures finished lower on Friday, on speculative selling after the release of the bearish USDA data. Markets were also watching the possible effect of hurricane Ivan in the Caribbean. Hurricane Ivan, now a Category 4 storm, took aim at Jamaica on Thursday, and it seemed on a forecast track toward Florida by early next week.

Speculative selling hit cotton prices after the US Department of Agriculture's monthly supply/demand report said US cotton output would hit a record 20.90 million (480-lb) bales in 2004-05. The estimate was above the peak harvest of 20.3 million bales from 2001-02, when cotton prices sank to a 29-year low below 30 cents a lb. Analysts, on average, had expected the latest data to show a figure around 19.9 million.

World production was pegged at 107.25 million bales, with global use estimated at 100.85 million. As mentioned earlier, the current pullback is considered a technical reversal as the fundamental factors remains bearish due to a large US cotton crop and record world cotton output.

The active December contract moved in our expected lines testing near-term support levels. Prices have broken the rising channel support trend line at 52.10c seen in the chart above. Cotton futures could not cross the important resistance at 56c which is the long-term falling channel resistance level. As mentioned earlier, caution should be exercised on getting unduly bullish as the current move is a technical correction and prices could fall back lower again. Bullish reversal can be confirmed only on the break of 57.35c. Support should now be seen at 50.65c.

Elliot wave analysis points towards a complex corrective structure currently underway. As mentioned earlier, we are in a corrective A-B-C pattern which still looks to be in progress. Only a daily close above 57.59c will confirm that we have begun a new impulse. This is also close to the 200-day EMA level watched by traders closely. RSI is back in the neutral zone indicating that it is neither overbought nor oversold. The averages, in MACD are above the zero line in the indicator suggesting bullishness. However, it needs to be seen if the momentum can sustain in the coming sessions. Only a crossover of the averages below the zero line in the indicator will suggest a bearish reversal now. Current prices are below the short-term average of the 8-day EMA at 52.09c and the 34-day EMA is at 50.18c cents. Look for prices to test the support levels. Supports, at 50.65, 49.10 & 48.25c. Resistances at 52.10, 52.50 & 53.55 cents 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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