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Cotton Moving Average Signals Bear Market: Technical Analysis

June 7 (Bloomberg) -- Cotton prices are headed for a bear-market drop of more than 20 percent this year after failing to close above their 50-day moving average at the end of last week, said Sharon Johnson at First Capitol Group LLC.

Cotton for December delivery, after the start of the U.S. harvest, closed June 4 at 75.28 cents a pound on ICE Futures U.S. in New York, below its 50-day moving average of 76.67 cents. That signals the contract is likely to reach 68.5 cents by the end of July and 60 cents by November, Johnson said.

“The contract’s inability to close above” the average “is the biggest indication” that prices are headed lower, said Johnson, a senior analyst in Atlanta who has been tracking commodities since 1973. “This is one of the last bastions of support, and funds are selling once these levels have been breached.”

Since reaching a two-year high of 87.1 cents a pound on April 26, the most-active cotton contract is down 14 percent on concern that output is rising in the U.S., the largest exporter. Last week’s 6 percent drop for futures was the biggest decline since July 2009.

Production of the fiber in the U.S. will rise 37 percent in the year that begins on Aug. 1 amid an increase in harvested acreage and “unusually favorable” soil moisture in Texas, the large cotton-growing state, the Department of Agriculture said on May 11. That would be the biggest harvest in three years.

“Rising output is a concern,” Johnson said.

To contact the reporter on this story: Debarati Roy in New York at droy5@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net.

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