The Hindu Business Line : Cotton may test support levels

NYCE cotton futures finished marginally higher on Friday, as the markets were range bound waiting for a clear direction from here. Market displayed little reaction to talk of poor weather in Texas, the top cotton growing area in the country, and a series of government reports outlining good sales of US cotton and healthier consumption from American mills.

The ICAC, in its monthly report, said production in the 2004-05 crop season would increase by 2.9 million tonnes (mt) from last season's 20.6 mt and consumption by mills were expected to rise for the same period. A record US cotton crop and large crops in other countries are keeping futures on the defensive. The US, the world's second biggest producer, is expected to harvest a record cotton crop in 2004-05 of 20.9 million (480-lb) bales. The monthly US Census Bureau report on annualised US cotton consumption reached 6.51 million (480-lb) bales. In its monthly supply/demand report, USDA pegged US mill consumption at 6.10 million bales. USDA said US net upland cotton sales hit 219,500 running bales (RBs, 500-lbs each), more than trade expectations.

The active December contract moved in our expected lines so far. Prices found resistance near the 50 cents level once again which is the falling channel resistance point. We can now expect a test of 44.50 cents and if it does not hold there then December contract has the potential to even extend towards the recent low of 42.35 cents. Minor support will be seen at 46 cents. Cotton futures found it difficult to cross the important resistance at 56 cents, which is the long-term falling channel resistance level as seen in the chart above.

As mentioned earlier, caution should be exercised on getting unduly bullish as the current move is a technical correction and prices could fall back lower again. Bullish reversal can be confirmed only on the break of 57.35 cents. Elliot wave analysis points towards a complex corrective structure currently underway. As mentioned earlier, we are in a corrective A-B-C pattern which still looks to be in progress. Only a daily close above 57.59 cents will confirm that we have begun a new impulse. This is also close to the 200-day EMA level watched by traders closely.

RSI is back in the neutral zone indicating that it is neither overbought nor oversold. The averages, in MACD have gone below the zero line in the indicator suggesting bearishness. Only a cross-over of the averages above the zero line in the indicator will suggest a bullish reversal now.

Current prices are below the short- term average of 8 day EMA at 47.54 cents and the 34-day EMA is at 48.96 cents. Look for prices to test the support levels. Supports, at 46.00, 45.25 and 44.50 cents. Resistances at 47.75, 48.25 and 49.50 cents respectively.

(The author is associated with the Multi Commodity Exchange of India (MCX). The views expressed in this column are his own and not that of his employer. This analysis is based on the historical price movements and there is risk of loss in trading. He can be reached at gnanasekar_thiagarajan@yahoo.com)

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