The cotton futures contract traded on the Multi Commodity Exchange (MCX) has been on highlight since mid-May. The contract emphatically breached a key resistance at ₹17,500 and ₹18,500 per bale (of 170 kg) while trending upwards.
However, the contract encountered a key resistance at ₹19,500 last week and is facing difficulty in surpassing this level. The contract is witnessing selling pressure over the last one week at ₹19,500 levels.
On June 16, the contract fell and formed a bearish engulfing candlestick pattern implying trend reversal and also signalling that the uptrend is approaching an end.
The daily indicators such as relative strength index and price rate of change of contract are displaying negative divergence backing this downward reversal.
Also, experiencing selling pressure, the contract declined ₹340 or 1.75 per cent to trade at ₹19,110 on Tuesday.
Further slump below the immediate key support at ₹19,000 will strengthen the near-term downtrend and drag the contract decline to ₹18,500 and then to ₹17,500 levels.
Short-term view: The contract has encountered a significant resistance at ₹19,500 last week and is reversing its trend backed by negative divergence in the indicators.
Traders with a short-term perspective can initiate fresh short position on a decisive fall below ₹19,000/bales while maintaining a stop-loss at ₹19,450 levels.
Short-term targets on such a fall are ₹18,500 and ₹17,500 levels.
Conversely, a conclusive breakthrough of ₹19,500 is required to alter the bearish outlook and take the contract higher to ₹20,000 in the same period.
As long as the contract trades above ₹17,500 the medium-term uptrend will be intact. Key supports below ₹17,500 are at ₹17,300 and ₹17,000.
The recommendations are based on technical analysis. There is a risk of loss in trading.a