Price of Crude Palm Oil may have bottomed out and short term rally expected

In my previous article I have mentioned that the price of crude palm oil in the futures market (FCPO) may have found a good bottom at RM1,400 per metric ton and that there are strong technical indications that price can rally to the next resistance level between RM2,400 and RM2,500 per metric ton. The price however, found resistance at RM1,660. It also managed to stay above RM1,400. Therefore, the forecast is still valid.

Heavy pressure from declining global demand for commodities is a primary resistance to the price of crude palm oil. Price of crude oil has found support at US$40 per barrel and is currently trading at US$43. The price of crude palm oil is currently trading at RM1,545 in the futures market. Palm oil stock has increased to 2.1 million tonnes, 14% higher from the corresponding period last year. Exports were slowing down in China and Netherlands.

The price of FCPO is still in a major down trend while the short term trend is showing signs of reversal. Price is below the declining 60 and 90 day moving averages but above the short term 30-day average. The 30-day average has also started to stay firm sideways. The long term 90-day average is currently at RM2,040 per metric ton. The gap between current price and the long term average has narrowed down from 33.6% to 23.7%. This shows that the price is currently in a down trend correction.

The price action since end of October has indicated that the market has found a bottom, at least until now. A triple bottom chart pattern is currently in formation. Theoretically, the triple bottom is confirmed when the price breaks above the pattern neckline which is at RM1,700. Please refer to chart below.

There is a high chance that the price is going to test the RM1,700 level and break above it because it is supported by momentum indicators like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). Both these indicators are increasing, indicating rising a bullish momentum. If price is able to rally above the neckline, price target for the triple bottom formation is RM2,100.


Daily FCPO chart as at 16 December 2008 using NextVIEW Advisor. Click on chart to view enlarged chart.

Therefore, the market has a bullish potential in the short term with conservative price target around RM2,050 to RM2,100. The forecast is only valid if the price stays above RM1,400. There is also a possibility that price is able to rally to RM2,400 to RM2,500 (an optimistic target), a target that I have mentioned in my previous article using a cluster of Fibonacci retracement levels.

However, if worldwide demand for crude palm oil continues to deteriorate and price falls below RM1,400, we may see a continuation in the down trend with a price target at the next support level of RM1,000. Planters are already taking precautionary steps to lower down production costs by reducing fertilizers, which is still expensive at the moment.

The price of FCPO is currently half the price of what it was in the beginning of the year. Price of FCPO was around RM3,000 per metric ton in January, with a peak of RM4,330 in March.

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Article contributed by Private Trader, Market Expert, Trading Coach and Chief Market Strategist of Nextview, Mr. Benny Lee. For more articles and commentaries from Benny, click HERE.

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