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Drought may lift NY cotton

Gnanasekar.T

NYCE cotton futures finished the week lower, on predictions of good weather in the growing areas. Volumes were very meagre helping the downside potential more. Last week saw volatile movements in cotton futures and by the end of the week the move upwards proved to be a correction and the longer term trend being intact towards the downside.

Cotton farmers in North Carolina got a brief respite from pervasive dryness with widespread light showers on Thursday. However, Georgia remains locked in an expanding drought as dry weather in the southeast and mid-south has left farmers without meaningf ul rain for the past month. Analysts are split on the potential impact of this dry spell on cotton production, with ideas of potential production losses ranging from one million to 6 million bales.

The US Department of Agriculture has pegged 2000-02 production at 18.8 million bales, with export sales of 9.0 million, domestic use of 9.0 million and ending stocks of 6.3 million. The National cotton council has predicted for cotton prices to stay in t he 40 cents range for a long period. Projections were based on higher ending stocks in 2001-02 and the need to keep US cotton competitive in the world market.

China one of the main importers from US has till now not issued licenses and, therefore, an export target of 1-1.5 million bales seems highly unlikely. With all these factors in mind, only a drought overseas could lift prices in the near term.

Key July contract rose to as high as 47.20 cents a reversal we predicted last week. However, it found tremendous resistance at this level and could not pierce this crucial resistance level. A trend channel drawn shows the Friday's low is close to breakin g the trend line at the bottom and this could easily see July futures heading to 40 cents.

RSI is still showing a positive divergence and therefore scope for near term correction up wards is possible. MACD is the verge of crossing over downwards when the contract tried testing the low of 43.80 cents again indicating weakness in the medium term to long term.

Using the Elliot wave technique in technical analysis, we could be in the middle of a bearish move and has a potential to test 38 cents on the downside. The two exponential averages are still at quite a distance. This denotes the long term trend continue s to be bearish though a short term correction upwards is possible. On a technical level, support in July cotton would be at 43, 40 and 38 cents while resistance will be at 44.75, 46 and 47.20 cents on the upside.

(The author is an 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.)