The cotton futures contract traded on the Multi Commodity Exchange (MCX) has tumbled over 5 per cent in the last three trading days.

China, the world’s largest consumer of cotton deciding to curb imports and use domestic cotton since the beginning of this year has kept the commodity price under pressure.

The recent fall has ended the corrective rally and resumed the overall downtrend that has been in place since May 2014. This offers a good opportunity for the traders with a medium-term perspective to initiate short position in the contract.

Short-term view: The corrective rally in the contract that had begun from the January low of ₹13,970 halted at a high of ₹16,890 in the month of May.

Technically, at the 38.2 per cent Fibonacci retracement resistance level at ₹16,827, the contract met with a resistance and reversed downwards.

After hovering around the 200-day moving average for more than two months, the contract has declined sharply in the past week. Immediate resistance is at ₹15,550. A fall to ₹14,650 looks likely in the short term.

Medium-term view: The price action on the chart since the third week of April suggests the formation of a descending triangle pattern.

The sharp 4 per cent fall this week has broken this triangle on the downside thereby signalling the start of a fresh leg of down move. Key resistances are poised at ₹15,600 and ₹15,825 – the 21-week moving average level.

Any bounce back to these resistance levels is likely to attract fresh selling interest into the market. A fall to ₹14,000 is possible in the coming weeks.

Traders with a medium-term perspective can go short. Stop-loss can be kept at ₹15,650 for the target of ₹14,150. Intermediate rallies to ₹15,500 can be used to accumulate short position.

The outlook will turn bullish only if the contract breaks and records a strong close above ₹16,000. But such a strong rise looks unlikely at the moment.

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

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