The Hindu Business Line : Cotton in for correction

NY Cotton futures closed higher on Friday mostly in switch trade from front month July to the new crop December cotton. Most players are keeping tabs on the development of the cotton crop, weather conditions in the US and in other places like China, the world's top consumer of cotton. The trade will also be closely watching whether the textile dispute between the US and China will be resolved over the next few weeks.

Markets also took note of news that the US and China will be having initial consultations to diffuse textile trade tensions. China will be on everyone's mind, especially after the US Department of Agriculture projected its cotton imports in 2005-06 at a whopping 15 million (480-lb) bales. A better-than-expected US cotton sales weekly report from the USDA gave a boost to cotton futures. USDA said US cotton sales hit 273,500 running bales (RBs, 500-lbs each), much above trade expectations, once again confirming the robust demand growth.

The now active December contract is moving in a range. Major support for the December contract is at 49.58 cents followed by 48.25 cents. A gradual rise towards 55 cents can be expected in the coming week. However, resistance will be quite strong there. As expected we saw prices retracing higher on the back of indicators lying in oversold conditions. Believe the current move higher to be a corrective bounce and does not show any signs of a major uptrend from here.

Elliot wave analysis points to a corrective A-B-C pattern, ending at 41.71 cents and a new impulse possibly in progress. This will hold good till 45 cents holds the downside. Unexpected break below this level will force us to change our wave counts. RSI is now in the neutral zone, indicating that it is neither overbought nor oversold.

The averages, in MACD are below the zero line in the indicator indicating bearishness. Only a crossover of the averages below the zero line in the indicator will suggest a bullish reversal. Current prices are below the short-term average of 8-day EMA at 50.55 cents and the 34-day EMA is at 51.20 cents. Therefore, look for prices to move higher initially and then correct lower subsequently.

Supports are at 49.57, 48.25 and 46 cents. Resistances are at 52.50, 53.25 and 55 cents respectively.

(The author is associated with the Multi Commodity Exchange of India Ltd. 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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