* Speculators unwind longs, seasonal selling up
* Open interest the highest since mid-June
* Some fear U.S. rain could damage crops
* Cotton returns to long-term downward technical path

NEW YORK, Sept 28 (Reuters) - Cotton ended the third quarter
lower as speculative investors unwound bullish bets and seasonal
selling started ahead of the Northern Hemisphere harvest amid
expectations of a record surplus.
Selling accelerated in the past two weeks amid fears that
China will start unloading a portion of its massive strategic
stockpile.
Building on its 24 percent plunge in the second quarter, New
York cotton for December delivery ended the quarter at
70.65 cents per lb on ICE Futures U.S., down 1.3 percent from
the end of June.
That was down 1.2 percent from Thursday's settlement.
"The harvest pressure has become apparent. I'm surprised
it's not doing better. It's the last day of the month and
quarter, and the specs have got short," said Sharon Johnson, a
cotton specialist at Knight Futures in Atlanta, Georgia.
Speculative investors have opened new shorts this week,
traders say, pointing to a 3 percent rise in open interest -
contracts outstanding - to almost 190,000 lots this week, its
highest since mid-June.
Hedge funds and other speculative investors almost halved
their net long position in the week to Sept. 25, the Commodities
Futures Trade Commission data showed on Friday.
The net long of just over 10,000 lots revealed this group of
investors were at their most bearish since mid-August.

Even so, the market remained on weather watch, with rain in
the U.S. mid-South, a major cotton growing area, this far into
the Northern Hemisphere season potentially hurting relatively
mature crops.
With most bolls, when the protective capsule surrounding the
fiber is open, crops are more prone to damage from the elements,
particularly in heavy wind and rain.
But any loss in the United States, the world's third-largest
producer, would be eclipsed by growing output in India and
Pakistan, two major growing countries, analysts say. Certified
exchange stocks have dwindled, but this season's inventory is
expected to exceed 76 million bales, setting new records.

OVERSOLD, BUT NOT OVERDONE
Technically, prices were close to being oversold with a
reading of 36 on a Relative Strength Index (RSI), its lowest
since early June. A reading below 30 represents oversold
territory.
But after failing to pierce 80 cents in August and having
broken out of recent narrow ranges to the downside, fibers are
on technically weak ground. Traders expect prices to test 69
cents ahead of the harvest.
Pressure remained even as grain prices soared after U.S.
Department of Agriculture data showed stocks shrank far more
than expected this summer as the worst U.S. drought in half a
century decimated supplies.
Cotton's fortunes are in stark contrast to the broader
commodity market, which was on track for its biggest quarterly
gain in nearly two years after central banks launched stimulus
plans.
But investors remain wary about further gains amid
struggling global economies.
The Thomson Reuters-Jefferies CRB index, a global
benchmark for commodities, was on course to post a gain of
nearly 9 percent in the third quarter, the biggest rise since
the fourth quarter of 2010. It was up 0.64 percent on the day.