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Correction due in NY cotton

T. Gnanasekar

New York Cotton futures posted small gains in an uneventful session of narrow price changes. Trading activity was dominated by light positioning ahead of the Labour Day weekend amid a general lack of fresh market-moving news. After failing to make much h eadway on the downside last week, prices are trying to recover and stabilise at these levels.

Many traders sense a sold out marketplace. Once, prices hold at this level, the fear of another break in prices will slowly get disappeared. In addition, traders are looking at the prospect for a higher global production forecasts and carryover estimate because of stronger crop potential in China, India and Pakistan.

The weekly US Department of Agriculture crop progress report showed the US crop declined slightly but still remained well above year ago levels. Some additional support for the market continues to come from rains moving into the southern cotton belt. Tra ders are also watching a potentially big storm developing off the west coast of Africa that could become a major talking point by next week depending on its development and direction.

After falling to new contract lows in the last week, the cotton market has reached price levels that keep US cotton the most attractive source of origin for textile mills. The Cotlook A Index was unchanged at 42.95 cents per pound.

December cotton continued to struggle to gain a foothold above a declining horizontal line off the July lows. Since breaking below this potential support line, December has only found selling interest on rallies back up to this new line of resistance. La st week this line crossed at 39.89 cents and the session high was 39.92 cents. The failure to break above this resistance line or get back above 39.95 cents left the market vulnerable to selling pressure.

RSI has entered the oversold situation indicating that a correction up wards is due. However, it could linger in the oversold zone for a while before turning up wards. A positive divergence in RSI continues which are good signs of a correction due. A pos itive divergence occurs when prices are making a new low, which is not confirmed by a new low in the indicator. MACD has also given a positive divergence both in the daily and weekly charts. A positive divergence by more than one indicator adds more stre ngth to our view that prices will rebound up wards shortly.

Current prices are close to the short- term average of 9 EMA and the 50 day EMA is at 42 cents. A break of the 9 EMA would set off a short-term rally. However, a long-term bullish signal will be generated once the 50 day EMA is pierced. Therefore, look f or a sharp reversal up wards in the weeks to come. Important support levels are at 38.80, 38.55 and 37.50 cents. Resistances, at 39.50, 40.30 and 41.95 cents.

(The author is a Chennai-based technical analyst who tracks the international commodities futures markets. This analysis is based on historical price movement of the commodity concerned. There is risk of loss in trading.)