The Hindu Business Line : Consolidation likely in cotton

Though overall fund buying in commodities provided support for cotton futures, market participants keenly await the monthly demand/supply report from the USDA for further direction. Demand has been consistent despite the prospects of a huge crop due to heavy offtake from countries such as China, the world's top consumer of the fibre.

Meanwhile, the US Department of Agriculture's weekly export sales report showed US net upland cotton sales at 167,900 running bales (RBs, 500-lbs each), below market expectations. The US Department of Agriculture has projected US cotton exports in 2005/06 (August/July) to hit a record 16.4 million (480-lb) bales, with production seen at 23.7 million bales.

The now active March contract is moving in line with our expectations. Prices are still stuck in a narrow trading range with an upside bias. As mentioned earlier, the bigger picture weekly charts continue to show a bullish triangle pattern in the making and therefore, it is difficult for prices to fall lower sharply. Prices are now expected to edge higher towards 55-56 cent levels and find resistance there. And as long as cotton futures stay above 50.75-51 cent levels, expect prices to rise higher in the coming sessions towards 60 cents or even higher. Only a daily close below 48.25 cents will signal bearishness in cotton futures.

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 48.25 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 above the zero line in the indicator suggesting a bullish reversal in the bigger picture. Current prices are above the short-term average of 8-day EMA at 54.51 cents and the 34-day EMA is at 53.48 cents. Therefore, look for cotton futures to consolidate and rise higher.

Supports are at 54.35, 53.10 & 52.50 cents. Resistances at 55.60, 56.45 & 58.25 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.)