The Hindu Business Line : Bearish trend in NY cotton futures

NEW York cotton futures ended lower on Friday on speculative selling as a huge US cotton crop looms over the market. Higher carryover stocks and the current US harvest season are expected to keep prices under pressure.

The size of the crop was illustrated in the recent US Department of Agriculture monthly supply/demand report for September which forecast the 2005/06 US cotton crop at 22.28 million (480-lb) bales.

In August, the USDA pegged the US crop at 21.29 million bales. In the 2004/05 season, the harvest hit a record 23.25 million harvested bales. Cotton futures could also come under trouble if consumer demand for cotton gets dented due to rising crude oil prices. The focus now would mostly be on expected cotton demand in the 2005/06 marketing year (August/July) and how much of it would come from China.

The USDA said the US cotton sales amounted to 1,30,500 running bales (RBs, 500-lbs each), below market expectations.

The Active December contract fell lower below the psychological resistance of 50c. The rising trend line has been supporting cotton futures as seen in the chart. Important support is at 48.90-95c being the trend line support point. Unexpected break below the trend line support at 48.90c could take cotton futures lower to 47.65c or even lower.

As mentioned earlier, clear direction for cotton futures looks difficult till a move above 53c is seen or a fall below 48c. Favoured view is to look for a fall towards 47-47.25c followed by a rise higher from there.

Elliot wave analysis points to a corrective pattern in progress, ending at 41.71c and a new impulse still in progress. The corrective second wave of that impulse looks to have ended at 46.10c.

A daily close below 46c will negate this possibility and a major downtrend could set in subsequently. RSI is 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. Current prices are above the short-term average of 8-day EMA at 50.25c and the 34-day EMA is at 50.43 cents. Therefore, look for cotton futures to test the support levels and then rise higher subsequently.

Supports are at 48.90, 47.65 & 46.30c. Resistances at 50.15, 52.50 & 53 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 necessarily that 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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