Has the price of Crude Palm Oil bottomed out?

The price of crude palm oil futures (FCPO) fell RM115 or 4.6% today to close at RM2354 per barrel. Price of FCPO has been in a down trend since mid of July this year after about a four month correction. The highest close in history was set this year at RM4330 per barrel on the 3rd of March. With today's closing price of RM2354, it simply means that the price has fallen 45.3% since the historical high and it took only about 6 months.

The price today is also equivalent to the price in August last year. So, it took about 11 months for for price to up and months to go down. One of the characteristics of the markets (any markets, whether it is equity or derivatives) is that price falls faster than it goes up. As a trader you can actually make money faster by going short (short sell in he futures market) but most investors do not actually know how to do it.

The price is currently at a support level (it was once tested on the 19th of August). So, can this support level hold the price of FCPO and cause it to turn around and rally upwards?

Technically, price is in a very strong down trend. it was oversold in early August and the price did rally upwards but a small one with resistance at RM2753. The failure to at least rally to its short term average (RM2,900) shows that the strength of bears is strong.

Based on retracement and expansion studies using Fibonacci ratios, the next support level RM1940 to RM2000.

Fundamentally, demand of Crude Palm Oil and other edible oils is expected to decline because of slowing economy and rising inflation. Inflation has started to ease a little with the decline in price of crude oil, but that does not really improve the slowing economy much. Price is not expected to increase at least until winter in December.


Daily FCPO chart as at 9 September 2008, using NextVIEW Advisor

Therefore, there is a high chance of price falling lower, at least to test the next support level of RM2000. However, if price is able to maintain above current support level (RM2351) and start to overcome its resistance of RM2750, then we have a confirmed bottom (double bottom chart pattern confirmation) and price shall rally further.

Bursa Malaysia's US Dollar-denominated crude palm oil futures contract, known as FUPO, marked its entrance today (5th September 2008) into the Malaysian derivatives market. As a cash-settled contract, FUPO is aimed to attract more foreign traders and investors who wish to trade in the US dollar currency.

Dato' Yusli Mohd Yusoff, CEO of Bursa Malaysia Berhad, said, "This first multi-currency product from Bursa Malaysia offers a lot in terms of trading opportunities to a new segment of the market. We expect that, like any other new product in the market, it will take time before the numbers increase but we are confident of the prospect of this unique product which meets the international demand for currency risk management tools." Source: Bursa Malaysia

Commentary and Analysis by Benny Lee