Crude Palm Oil: Strong Resistance at RM 2,800

The price of crude palm oil in the futures market (FCPO) has been very bullish in the past one month, despite being overbought and having a technical resistance at RM2,540 per metric ton. The price of FCPO surged RM204 or 8.3 percent on-month. It went as high as RM2,799 twice this month but failed to break above this level before settling at RM2,663 on Friday. The surge in price was a result of speculation because of improving export figures. The price has retraced to almost 50 percent from the high of RM4,486 in March 2008 to a low of RM1,331 in October 2008.

The weakening price movement in the past few days despite strong fundamental factors shows that the market has already anticipated these factors and is already discounted in the current price. There is a strong resistance at RM2,800 and to go beyond this level, the market needs a much stronger catalyst to boost the price of CPO.

The price of FPCPO is still in a very strong up trend, but a little weaker from last month. The short and long term 30- and 90-day moving average is still up but the price is getting nearer to the short term average. The weaker momentum is also detected in momentum indicators like the Relative Strength Index (RSI) and the Average Directional Index (ADX). Both these indicators’ values are declining. The daily average volume for mid-April to mid-May is 12,700 contracts, a 44 percent increase from the previous corresponding month. The high increase in volume with price not getting higher also indicates that the price of FCPO is toppish.

The price of FCPO is currently 21.3 percent above the 15-week moving average. It was 23 percent above this average last month. The decline in the price momentum this week was the first in eight weeks. The 15-week average is currently at RM2,194 while the longer term average (30-week average) is at RM1,910. The presence of “doji” Japanese Candlesticks chart patterns in the past two weeks on the weekly chart shows that the market is toppish and a correction is likely going to happen.

The resistance at RM2,800 is strong because it was tested twice this month without being able to break above it. With weaker bullish momentum and toppish price patterns, the price of FCPO is expected to go into a downward correction this month, with a higher confidence. The price is expected to pull back to the averages between RM1,900 and RM2,200. Therefore a sharp pull back is expected. There is a saying in the market that if price goes up sharply, it falls sharply also.


Daily FCPO chart with volume as at 15 May 2009 using NextVIEW Advisor Professional

****

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.