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Cotton futures may head higher

Gnanasekar T.

NYCE cotton futures ended softer on Friday in a dull trade, with thin volumes. Market participants continue to watch weather forecasts closely for ideas on what crop conditions will be during the harvest. A tropical depression over the Gulf of Mexico is being watched the markets very closely. A stronger dollar is now capping any strong gains in futures.

Cotton Outlook on Thursday lowered its forecast of the 2003-04 global cotton deficit to 965,000 tons from 1.224 million tonnes last month, reflecting an increase in output and a drop in usage. Cotlook, an independent research firm specialising in the cotton market, revised higher its output estimate for the US, a key world producer, by 150,000 tonnes to 3.726 million tonnes against 3.576 million in July. On the consumption side, the 36,000 ton cut in consumption was entirely attributed the US, where the textile industry's prospects continue to decline in the face of rising textile and clothing imports.

The active December contract moved higher quite sharply after taking support at some key levels. The 50 per cent Fibonacci retracement at 55.60 cents held well and a quick recovery helped in prices moving above the recent channel formation which we have discussed earlier in our up dates. The channel's resistance point at 56.85 cents was broken with a gap.

Crucial resistance will be at 59 cents and a close above that will set cotton futures to another rally above recent highs. As mentioned earlier the wave structures are on the verge of another move and this will be confirmed after a break above 59 cents, which could be another possible impulse wave rally after the A-B-C correction is over. Therefore, any clues to further moves will be decided on the break of 59 cents on the up side or a move below the 55 cents level.

There is a minor positive divergence seen in the RSI indicator where prices have made a low, which is not confirmed a low in the indicator. This was one of the reasons for a correction last week.

RSI is however, in the neutral zone now indicating that it is neither overbought nor oversold. The averages in the MACD have started coming close to the zero line again. A crossover above the zero line will change the trend to bullish for cotton futures.

Current prices are above the 9-day period EMA at 57 cents and the 50-day period EMA is at 57.90 cents. Look for prices to head higher. Resistances at 57.50, 58.65 and 60 cents. Supports at 55.60, 54.50 and 53.85 cents respectively.

(The author is a trader with Scotiabank and the views expressed by him are his own and not necessarily that of his employer. This analysis is based on the historical price movements and there is risk of loss in trading.)

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