Cotton prices have been falling consistently over the last few weeks. The cotton futures contract on the Multi Commodity Exchange of India (MCX) has reversed sharply lower after making a high of ₹23,300 per bale in mid-October. The contract has tumbled over 8 per cent and is currently trading at ₹21,400 per bales.

Outlook

The sharp fall below the key support level of ₹22,000 and ₹21,700 in the past week has strengthened the down move. The outlook is negative for the MCX-Cotton futures contract. The indicators on the charts are also negative. The 21-day moving average is on the verge of crossing below the 200-day moving average. This is a negative signal indicating that the upside could be limited.

The contract can fall to ₹21,000 in the short term. The levels of ₹21,700 and ₹22,000 will now act as a strong resistance and will cap the upside.

The medium-term view is also negative. A complex head and shoulders pattern which is a bearish reversal pattern is visible on the daily chart. The neck-line resistance is poised around ₹21,700. So, as long as the contract trades below ₹21,700 there is a strong likelihood of it tumbling towards ₹20,500 or even lower over the medium term.

Trading strategy

Traders with a medium-term perspective can go short at current levels and also on rallies at ₹21,600 and ₹21,700. Stop-loss can be placed at ₹22,200 for the target of ₹20,500. Revise the stop-loss lower to ₹21,300 as soon as the contract moves down to ₹21,100.

Note: The recommendations are based on technical analysis and there is a risk of loss in trading.

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