The Hindu Business Line : Cotton may test resistance, dip

NYCE cotton futures finished at a two-and-half month peak on Friday on fund and speculative buying, which was more of a technically inspired rally although the broad fundamentals remains bearish, such as high US production and a supply surplus.

Another bullish sign was three straight daily rises in open interest in New York futures, which showed new long positions, were being established. Fibre contracts are also being helped by strong exports lately. Though fundamental outlook for cotton is dominated by record crops in the US and in other countries like China, heavier fibre demand is seen helping to absorb the large amounts of cotton being harvested around the world. This is clearly visible from the USDA weekly export sales data released till now. As mentioned before market participants will have to contend with a record US and world cotton output as estimated by the USDA earlier this month. Switch from crude-based synthetic fibre to cotton and expiration of a textile agreement in 2005 is believed to be important factors helping offset record crops in the US and in the world.

The active March contract broke out of the narrow range in which it has been moving in the month of December. Important resistance at 45 cents was broken and a daily close above 46 cents is now expected to see a short-term rise towards 49-50 cents also being a long-term falling channel resistance point and the 200-day ema point, as seen in the chart above.

We can now expect a test of the long-term falling channel resistance at 48.65 cents. Support has held till now on the lower side of the range at 41-42c levels. Crucial support is at 41cents a low made on 2002.

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. A new impulse might have begun, but we would like to wait for confirmation of the same. Only a daily close above 55 cents will confirm that we have begun a new impulse.

RSI is in the overbought zone now indicating that a correction to take place. The averages, in MACD have gone above the zero line in the indicator suggesting bullishness. Only a crossover of the averages below the zero line in the indicator will suggest a bearish reversal now. As mentioned in the previous week's update positive divergence is noticed in both the indicators which makes us believe that we could see a bullish reversal. Current prices are above the short-term average of 8-day EMA at 45.10 cents and the 34-day EMA is at 44.16 cents. Look for prices to test the resistance levels and then correct lower.

Supports at 44.78, 43.50 and 42.85 cents. Resistancesat 47.20, 48.65 and 49.30 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 that 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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