The Hindu Business Line : Cotton may turn bearish

NEW York cotton futures ended marginally lower on Friday as the nearby December month came under pressure due to switch activity. Fundamentally, the market is monitoring the pace of the cotton harvest in the US and how demand is shaping up in the 2005/06 marketing year.

The USDA has forecast US cotton exports in 2005/06 at 16 million (480-lb) bales, up from last month's forecast of 15.3 million. Market participants were encouraged by the weekly export sales report of the US Department of Agriculture. USDA said US cotton sales amounted to 284,000 running bales (RBs, 500-lbs each), up from last week's 152,600 RBs.

Downward pressure on prices will be seen in the coming weeks as the US cotton harvest gets under way and recent strengthening of the dollar could also add to the bearishness.

The active December contract headed lower against our expectations. Prices have broken the key 200-day EMA level and closed below it, signalling bearishness. Near-term resistance is at the falling trend line channel resistance at 52.65 cents.

The major support is at 50.25 cents, a long-term rising trend line support point. Unexpected break of this level is expected to trigger bearishness.

The favoured view is to look for cotton futures to head higher after testing 50.25 cents. A move above 53 cents directly, on the other hand, will take prices higher towards recent resistance at 58.25 cents or even higher towards 60 cents.

Elliot wave analysis points to a corrective pattern in progress, ending at 41.71 cents and a new impulse still in progress.

The corrective second wave of that impulse looks to have ended at 46.10 cents. Daily close below 49.10 cents will change this outlook and lead to a sharp fall lower.

RSI is 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 a bearish reversal.

Current prices are below the short-term average of 8-day EMA at 52.37 cents and the 34-day EMA is at 53.07 cents. Therefore, look for cotton futures to head lower.

Supports are at 50.25, 49.10 and 48.25 cents. Resistances at 52.65, 54 and 57.50 cents respectively.

(The author is associated with the Multi Commodity Exchange of India Ltd. 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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