* Open interest highest since Feb 2011
* Liquidity moving out of March into forward contracts
* With stock rise, China holiday looming, prices may be due correction
NEW YORK, Feb 1(Reuters) - Cotton prices rose again on Friday as speculative buying outpaced merchant selling and extended fiber's rally to a fifth straight week, its longest since its 2011 bull run.
The most-active March contract on ICE Futures U.S. rose 0.03 cent, or 0.04 percent, to settle at 82.98 cents per lb, after hitting an intraday high of 83.45 cents.
"The battle between spec longs and trade shorts has turned more even this week, as the market yo-yoed back and forth in volatile fashion," said Peter Egli, director of risk management for Plexus Cotton Ltd, a British-based medium-sized merchant.
The size of the gains this week were not as dramatic as last week when March prices hit seven-month highs of 84 cents per lb, but the hedge funds' bullish bets propelled the fiber to its longest winning streak since its early 2011 bull run.
The market's failure to take out 84 cents was seen as a minor victory for the bears, he said.
With certified stock rising, index fund rolling their positions forward, futures remaining above cash prices and the Chinese Lunar New Year holiday fast approaching, the odds are in favor of a correction.
"From a technical point of view, the market has started to flag sideways, and this congestion pattern will soon be resolved by March either taking out the 84 cents high or by breaking below a near-term uptrend line that runs through around 82.30 cents at the moment," Egli said.
Even so, further forward prices all touched new eight-month highs this week and open interest has continued to rise, hitting their highest level since the market's last bull-run.
The number of outstanding contracts rose by just over 3,200 lots on Thursday to 208,681 contracts, its highest level since February 2011. A month later in March 2011, prices peaked at $2.20 per lb, a record since the U.S. Civil War in the 1860s.
Liquidity in the March contract has already started to fall ahead of first notice day next Friday when the U.S. Department of Agriculture will publish its monthly crop report and March options expire. Trade is moving into May, July, which is the old crop, and December, which represents the new 2012/13 crop. (Reporting by Josephine Mason; Editing by Marguerita Choy)