Crude Palm Oil: In a longer term correction

The market turned bearish last month after a short term bullish rally from RM2,000 per metric ton in July to a high of RM2,515 in just one month. It turned bearish when the price of FCPO tested and broke below the RM2,300 support level early September. I have mentioned that if this support level is broken, the price may hover around the averages at about RM2,100, from the intermediate up trend line from October 2008. The price of FCPO closed at RM 2,145 on September 11, RM319 or 13% lower from a month ago. The thought having the price of FCPO going to test RM2,800 again this year fades away.

The decline in palm oil prices were mainly due to decline in exports. Malaysia palm oil inventories were up at the end of August. MPOB reported palm oil stocks increased 6.2% on-month to 1.42 million tons. Malaysian palm oil exports declined due cutbacks in palm oil imports from the European Union and China. MPOB said that exports were down 9.5% on-month to 1.32 million tons in August. Cargo surveyors SGS Services and Intertek Agri Services estimated palm oil exports for 1 to 10 September to decline 17% and 15% on-month respectively. Favourable weather in Malaysia and India's Meteorological Department announcing a revival in monsoon rains may ease drought in India, boosting crop development. These fundamental provide resistance for the price of crude palm oil to move higher.

The price of FCPO has gone below the moving averages and the 30, 60 and 90-day moving averages have just started to decline. The averages are between RM2,200 and RM2,300. The FCPO price is currently right above the intermediate up trend line. Trading volume has slightly improved with a daily average of 10,400 contracts as compared to 9,200 contracts in the previous month and this indicates a selling pressure because of the price decline in the past one month.

Because the price did not rally upwards, a long term correction chart pattern called the “triangle” has formed and this can be easily identified on the weekly chart. The support level of the triangle pattern is currently at RM2,050 while the resistance level of this pattern is at RM2,400. Therefore, price is currently near the support level. As long as the price stays within this support and resistance level, the price is still in a correction. A breakout above the resistance level would cause the price to rally but a breakout below the support level would cause price to decline further.

Momentum indicators are mixed with a slightly stronger bearish strength. Indicators on the daily chart are bearish. The Relative Strength Index (RSI), Momentum indicators are below the mid-level. The MACD indicator is declining and is now below zero which means that the trend is down. The rising ADX indicator also shows strong bearish trend. However, in the longer term, momentum indicators on the weekly chart are mixed where the indicators are almost neutral.

Price is currently near the support level and a rebound is expected at around RM2,000 to RM2,050 to at least the average price in the correction period and that is RM2,300. In the longer term, the price trend direction depends on whether the price breaks above the support or resistance level. In the short term, the FCPO price is expected to stay between this support and resistance levels. If FCPO price is unable to stay above RM2,000 and breaks below it, the price is expected to fall and test the next support level at RM1,700. If price breaks above RM2,400 resistance level, then we may expect price to rally to test the RM2,800 resistance level again.


Daily FCPO chart as at 10 September 2009 using NextVIEW Advisor

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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.