The Hindu Business Line : NY cotton prices may head South

NYCE cotton futures finished lower on Friday on lack of follow-through with no market driving news expected immediately. A record US cotton crop and large crops in other countries are, keeping futures on the defensive. Fundamentally, the market is digesting news of large world crops.

In its monthly supply/demand report this week, the US Department of Agriculture forecast world cotton output in 2004/05 will hit 109.67 million (480-lb) bales from 107.25 million last month. The US production was increased to a record 21.54 million bales from 20.9 million in last month's report. Markets were expecting the USDA to reduce its estimate of the US cotton in light of the recent weather conditions in several cotton producing states.

Subsequently fibre contracts recovered due to speculative short covering giving a feeling that the markets had discounted the record crop. The market paid little attention to the weekly USDA export sales report which showed the US net upland sales at 98,800 running bales (RBs, 500-lb each), versus 1,31,900 RBs last week.

The active December contract headed lower in line with our expectations. Prices tested the support levels and finally found good support near 43.75c bouncing from there, which looks more like a corrective pattern only. The range has now become broader between 44-49c. A break of 44c on the downside again has the potential to test 42.50c or even lower.

However, if prices break the 49c level on the up side then we can expect it to test the psychological resistance at 50c followed by crucial resistance at 51.75-52 cents.

The potential to rally higher from here looks very unlikely as the bigger picture looks very bearish. Preferred view is to look for prices to head lower.

As we have been maintaining, 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.

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 have gone below the zero line in the indicator suggesting bearishness. Only a cross-over of the averages above the zero line in the indicator will suggest a bullish reversal now. Current prices are below the short- term average of 8 day EMA at 46.57c and the 34 day EMA is at 47.92 cents. Look for prices to consolidate and head lower. Supports, at 45.50, 44.50 & 43.25. Resistances, at 46.70, 48.25 & 49.50 cents respectively.

The author is associated with the Multi Commodity Exchange of India (MCX). The views expressed in this column are his own and not of MCX. 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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