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In this week's dissector we take a closer look at the cotton No 2 futures traded on the Intercontinental Exchange (ICE). It is the benchmark for the global cotton trading community. It closed at 82.9 cents a pound on Friday. Cotton prices advanced 10.3 per cent in January, marking the biggest monthly gain since August 2012, on cues of higher demand in China. But it was the worst performer among the agricultural commodities tumbling 18 per cent.
Long-term view
Cotton futures peaked out in March 2011 at the high of 227 cents a pound. Since then, the contract has been trending downwards. It has been in a long-term downtrend, shaping lower peaks and troughs. While trading down, cotton futures decisively broke through its significant long-term support at 145 cents with a downward gap and 115 cents in July 2011. Nevertheless, its next key long-term support band between 66 and 70 cents arrested its downtrend in June 2012 and provided base for the commodity.
A conclusive downward breakthrough of the long-term support band between 66 and 70 cents will reinforce bearish momentum and pull cotton futures downwards to 60 cents or even the subsequent support at 50 cents in the long-term. Important long-tem supports below 50 cents are positioned at 40 and 30 cents.
On the other hand, cotton futures faces long-term resistance at 85 cents. Decisive rally above this resistance will encounter subsequent resistance in the range between 96 and 100 cents.
Medium-term view
Key resistances above 96 and 100 cents band are pegged at 115 and 145 cents. A strong rally above 145 cents is required to alter the long-term downtrend and take the fibre northwards to 170 cents in the long-term.
Cotton No 2 futures continued its downtrend after breaking through its key support at 85 cents in May 2012. However, the presence of significant long-term base in the range of 66 and 70 cents arrested its downfall in June 2012. Thereafter, cotton futures took support consistently from the aforementioned base zone and began to trend higher.
Over all, cotton futures has been in a broad sideways consolidation phase in the price band of 66 and 85 cents. Cotton futures is trading well above its 50- and 200-day moving averages. Conversely, it is likely to encounter resistance at 85 cents ahead. Though cotton futures could fail to breach this resistance in the initial attempts, a strong break out will pave way for an up move to 94 cents and then to 100 cents in the medium-term.
Inability to surpass 85 cents will confine the commodity moving sideways between 80 and 85 cents band. Short-term support for cotton futures is at 75 cents. Key resistance above 94 cents are at 100 cents and then at 115 cents.
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