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Monday, Jul 08, 2002

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Columns - Technical Analysis


Downward correction likely in cotton

Gnanasekar.T

COTTON futures on the New York Cotton Exchange settled higher on Wednesday in a mixture of speculative and commercial support ahead of the four-day weekend. The NYCE was closed on Thursday and Friday for the US Independence Day holiday. Early selling in the week was attributed to light showers in Texas and more chance of rain in the coming weeks.

With Export registrations coming to a virtual halt now, shipments are expected in the range of 150,000-160,000 bales enough to meet the USDA target. The short week was dominated by speculative activity with the recent spec/hedge report showing a record net long position of 50 per cent of the open interest by speculators. With weather and temperature expected to favour the development of cotton in the coming weeks and a huge net long position by specs, there are good chances of a steep correction downwards in the coming weeks.

The active contract December is showing signs of a correction downwards to take place. A long-term double bottom pattern is also visible on the chart targeting 55 cents in the near to medium term. In the short term, a good correction downwards to at least 45 cents is possible before the long term target of 55 cents is met. A horizontal trend line support also lies at 45.32 cents and this will be a crucial support for cotton in the near term.

Any correction downwards should get supported above this level to keep the up trend intact. This also coincides with a 38.2 per cent retracement target from 36.80- 49.80 cents.

Using Elliot wave analysis, this could be the beginning of a new correction in the bigger picture with the end of a third wave and a corrective fourth wave to begin. RSI is in the overbought zone and a negative divergence is noticed which is a sign of a potential correction downwards in the making. The averages in MACD, are comfortably above the zero line in the indicator and as long as the averages are above the zero line in the indicator the current up trend will remain intact.

Current prices are close to testing the short-term average of 9 and the 50 day EMA at 43.85 cents. Look for a good correction downwards before the up trend resumes. Important support levels are at 47.20, 46.30 and 45.23 cents. Resistances at 49.80, 50.90 and 52 cents.

(The author is a Chennai-based technical analyst who tracks the international commodities futures markets. This analysis is based on historical price movement of the commodity concerned. There is risk of loss in trading)

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