The Hindu Business Line : Cotton futures may move lower

NYCE cotton futures finished sharply higher on speculative buying, as switch trading was again the focus this week too, with market participants transferring positions out of the front month contract. Trigger for this week's rally was the USDA weekly export sales report which came in the higher end of market expectations.

In its weekly export sales report, it said the US cotton sales soared to 454,600 running bales (RBs, 500-lbs each). As we have been maintaining, though fundamental outlook for cotton is dominated by record crops in the US and in other countries such as China, heavier fibre demand is seen helping to absorb the large amounts of cotton being harvested around the world. Speculative buying lifted fibre contracts higher recently, which was more of a technically inspired rally although the broad fundamentals remain bearish, such as the high US production and a supply surplus.

The active March contract pulled back higher on switch activity. Recent resistance at 45c has been broken yet again. Crucial resistance will now be seen at 46.45c being the falling channel resistance point. Cotton should break out of the recent trading range of 41-48 either ways, to provide a clear direction from here. Support has held till now at 41-42c level, a low made on 2002. The favoured view is to look for another dip below the recent low at 41c or even lower towards 38c and then reverse higher. However, a daily close above 47c will negate our bearish outlook. Elliot wave analysis points towards a complex corrective structure currently under way.

As mentioned earlier, we are in a corrective A-B-C pattern, which still looks to be in progress. The corrective pattern continues and the impulse we anticipated did not materialise. Only a daily close above 55c will confirm that we have begun a new impulse. RSI is in the neutral zone now indicating that it is neither overbought nor oversold. It is showing a negative divergence, where prices are making a higher high not confirmed by a higher high in the indicator.

The averages, in MACD have gone below the zero line in the indicator suggesting bullishness. Only a crossover of the averages above the zero line in the indicator will suggest a bearish reversal now. Current prices are above the short-term average of 8-day EMA at 44.05c and the 34-day EMA is at 44.60 cents. Look for prices to test the resistance levels and then head lower. Supports, at 43.50, 42.80 & 41.71c. Resistances, at 45.25, 46.70 & 48.25 cents respectively.

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

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