CRUDE PALM OIL: Immediate pullback in price expected.

Price of Crude Palm Oil futures (FCPO) traded in bursa Malaysia breaks above the RM2,000 resistance level late March and surged to the current level of RM2,459 per metric ton, higher than the price I have expected which was RM2,260 and much bullish than other “seasoned” analysts I have mentioned in my previous article. Price is up for 5 consecutive weeks and has retraced 38.2% from the RM4,486 to RM1,331 down trend. So, will the uptrend be able to supported and sustained?

The rise in palm oil price is because of lower stock pile and higher exports. Stock inventory have declined for four months and is now at its 20-month low as the government encouraged planters to chop down trees above 25 years old in a replanting initiative. According to the Malaysian Palm Oil Board (MPOB), palm oil inventory fell about 13% in February to 1.4 million tonnes. Renowned analyst Dorab Ministry cautioned last month that if the Malaysian palm oil stocks fall below 1.5 million, it could a dislocation in the industry because of higher prices and delayed shipments.

For the first time this year, exports increased 0.2% in March, as compared to the previous month. Exports are expected to be higher in April. Export estimates for April 1 to 10 is up 3.7% on-month according to cargo surveyor SGS(M) Bhd. Intertek Agri Services is even more optimistic with an 8.2% increase. However, expect exports to slow down a little because demand may decrease because of unattractively high price. Price of crude FCPO has soared to about 71% from the low of RM1,400 while price of palm oil substitute soybean oil has increased only about 25% from the low of $30.00.

The price of FPCPO is currently in a very strong up trend. The short and long term 30- and 90-day moving average is still up and the short term trend showing strong momentum upwards. The Average Directional Index (ADX) and Relative Strength Index (RSI) indicators which measure trend momentum increased recently after declining since February. The daily average trading volume (30-day average) has increased to about 10% to 8820 contracts on-month and the open interest daily average increased 3% on-month.

The price is currently overbought. The 14-day Stochastic Oscillator is currently at 90.8, indicating that price is heavily overbought. It is 23% above the 15-week moving average, which is used to calculate the “perceived value” of a commodity. The 15-week average is currently at RM2,000 while the long term average (30-week average) is at RM1,815. The Stochastic crossover and a bearish reversal pattern on the daily chart indicate a possible immediate pullback.

Using a Fibonacci retracement study, price is currently at a resistance level. The 38.2% retracement I have mentioned in the first paragraph is a Fibonacci retracement level. The parallel trend line on the chart also shows that price is at an uptrend resistance level. This analysis supports a pullback or price reversal.


Daily FCPO chart as at 15 April 2009 using NextVIEW Advisor. Click on chart for larger view.

I am not expecting price to go above the current high of RM2,540 because of these technical fundamental indicators. The average value is about RM2,000 but because of the uptrend, I’d expect the average to increase to about RM2,100 in month’s time. Therefore, I’d expect price to pull back and trade between RM2,100 and RM2,500 with a downward bias for this month.

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Published in Palm Oil Fortune Magazine. 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.