Cotton prices have begun the New Year with a bang. After being stuck in a narrow range all through December, cotton prices broke above a key resistance point by surging higher.

The cotton futures contract traded on the Multi Commodity Exchange (MCX) is up about 6 per cent and is currently trading near ₹20,120 per bale.

Cotton prices were on a strong downtrend in the second half of 2016.

The MCX cotton contract recorded a peak of ₹23,990 in July and tumbled to a low of ₹18,270 in November.

However, the downtrend halted at this low and reversed higher from there.

After consolidating in a sideways range in December, the prices have resumed their upmove.

Along with restricted arrivals, the Cotton Corporation of India’s decision to purchase at market price from various parts of the country has also aided this price reversal.

The recent rally eases the downtrend that was in place between July and November last year and also signals a trend reversal.

Medium-term view The outlook is bullish. The 21-day moving average is turning around and is signalling a cross-over above the 200- and 100-day moving averages in the coming days.

This strengthens the bullish view and suggests that the downside could be limited in the short- term.

There is strong support in the ₹19,500-₹19,200 band. Though an intermediate dip to test this support region cannot be ruled out, a break below this support zone is unlikely.

Immediate resistance is at ₹20,443. A strong break above this hurdle can take the contract higher to ₹21,120 — the 50 per cent Fibonacci retracement resistance point.

Traders with a medium-term perspective can make use of dips to go long near ₹20,000. A stop-loss can be placed at ₹19,350 for the target of ₹21,000.

Accumulate longs on dips near ₹19,500.

Revise the stop-loss higher to ₹20,150 as soon as the contract moves up to ₹20,650.

Note: The recommendations are based on technical analysis and there is a risk of loss in trading.

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