In this week's dissector we take a closer look at the cotton No 2 futures traded on the Intercontinental Exchange (ICE). It is the benchmark for the global cotton trading community. It fell 1.5 per cent for the week to close at 82.2 cents per pound on Friday. Cotton spot prices have plunged 12.5 per cent from its one-year high of 93.9 cents a pound marked on March 15 this year. The speculation-driven rally pushed the spot prices to a first quarter climb of almost 18 per cent.
Since peaking out from its March 2011 peak of 227 cents per pound, cotton has been trending downwards. Its long-term trend has been down since then, forming lower peaks and troughs. During this downtrend, cotton futures conclusively breached its key long-term support at 145 cents by gapping downwards and another at 115 cents in July 2011. However, the commodity found support at its subsequent key support zone between 66 cents and 70 cents in June 2012 and started trending higher.
The up-move since then failed to push beyond the significant resistance at 95 cents in March 2013. Cotton is hovering at around crucial trend-deciding level. It is trading just above key support level at 80 cents. An upward reversal from this support can take the commodity higher to 86 or to 90 cents. Further, an emphatic breakthrough of 95 cents can accelerate cotton northwards to 105 cents.
Next long-term resistances for the commodity are pegged at 115 cents and 145 cents. A strong rally above 145 cents is required to alter the long-term downtrend and take the commodity to 170 cents in the long-term.
Conversely, a decisive downward breakthrough of the long-term support band between 66 and 70 cents will reinforce bearish momentum. In that case, the commodity’s prices can decline to 60 cents or even to the subsequent support at 50 cents in the long-term. Important long-tem supports below 50 cents are positioned at 40 and then at 30 cents.
The uptrend that started from the key support band between 66 and 70 cents in late November 2012, encountered resistance at 94 cent in March 2013. Since then, cotton has been on a short-term downtrend. While trending down, cotton decisively breached its 21- and 50-day moving average in early April and hovering well below them. It is now trading just above key support at 80 cents.
A reversal from this support can take the cotton prices higher to 86 and then to 90 cents in the short- to medium-term. Only a strong rally above 95 cents will strengthen its bullish momentum and take it higher to 105 cents in the medium-term.
But, a sharp fall below 80 cents will pave the way for a decline to 75 cents in the near-term. Subsequent important supports are at 70 and 66 cents.