Cotton prices are on a strong footing. The cotton futures contract traded on the Multi Commodity Exchange has surged 13.3 per cent so far this year and currently trades at around ₹21,560 per bale (of 170 kg).

Strong demand from domestic millers as well as export demand has aided this rise.

The rally in cotton prices is anticipated to sustain as demand fior the commodity is expected to remain high.

Prior to the recent rally, the MCX cotton futures contract was on a strong downtrend and has been so since July 2016, when it tumbled about 24 per cent from a high of ₹23,990 per bale. The contract halted at a low of ₹18,250 in November.

After a brief consolidation for about a month, the contract reversed higher, signalling the end of the downtrend.

Trend reversal The strong break and a rise above ₹20,500 confirms the trend reversal in the contract.

The current uptrend is intact. But there is a key resistance coming up at around ₹21,800 — the 61.8 Fibonacci retracement level. A test of this resistance is likely in the near term.

Whether the contract breaks above this hurdle or not will decide the next leg of movement.

Any inability to break above the ₹21,800 mark may trigger a corrective fall.

A pullback from this resistance point can drag the MCX-cotton futures contract lower to ₹21,000 or ₹20,800.

On the other hand, if the cotton futures contract manages to breach ₹21,800 decisively then the uptrend can extend to ₹22,500 or even ₹22,700 thereafter.

Since the MCX-Cotton futures contract has been on a continuous rally over the last couple of months, the uptrend could be ripening for a corrective fall.

This leaves the possibility high of the contract reversing lower from ₹21,800 in the coming weeks.

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

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