The Hindu Business Line : NY cotton may head lower

NYCE cotton futures ended slightly lower on Friday on lack of follow-through buying and profit-taking in the market after a spectacular recovery in prices reaching a six-week high.

Cotton futures had hit a six-week high after a surprisingly friendly USDA monthly supply/demand report, options-related activity, news of crop losses in the key growing area of Texas, and poor conditions in the US Delta.

USDA sharply lowered world 2003-04 ending cotton stocks to 33.14 million (480-lb) bales from 34.5 million last month and cut world cotton output by 1 million to 95.50 million bales.

Robust US cotton sales in 2002-03 also prompted the USDA to raise its estimate of US cotton exports to a record 11.4 million bales, from the 11 million it forecast in last month's production report.

The weekly USDA export sales report was also bullish for the market. USDA said combined old crop and new crop US upland cotton sales reached 214,800 running bales (RBs, 500-lbs), up from 201,300 RBs last week.

The active July contract is moving as per expectations. A strong retracement was seen with good volumes hitting a six- week high of 56.90 cents.

As mentioned earlier support point at 48 cents held well, which is an important level from where prices moved higher after a long consolidation to touch the high at 60 cents. The correction lead to a test of the three crucial Fibonacci retracment points.

Prices went above the 61.8 per cent retracement target at 55.95, but failed to close above it. A gap has also been created at 53.90 cents and in an event like that there is a good possibility that this gap will be filled when prices head lower again.

As per Elliot wave analysis an impulse wave "C" has ended at 60.75 cents and we should, therefore, be looking for a down move from here, which will be the beginning of a new down trend cycle in cotton futures. We are still in the fourth wave, which is corrective in nature.

RSI has entered the overbought zone, signalling a correction lower next week.

The averages, in MACD are still below the zero line the indicator. Any change in trend will be noticed after the averages go above the zero line in the indicator.

Current prices are above the short-term average of 9-day EMA at 52.32 cents and the 50-day EMA is at 55.27 cents. Look for prices to consolidate and head lower. Resistances at, 55.55, 56.90 and 59.41. Supports at 54.80, 53.90 and 52.25 respectively.

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

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