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Malaysia palm oil may retract

Gnanasekar.T

Malaysia's palm oil futures witnessed an action packed week creating skyscrapers on the chart and reaching a 13- month high. Mainly, due to active short covering and trade- related buying, sparked by rises in Chicago and market-friendly June crop data. T he official Malaysian Palm Oil Board released the crop data, which said June palm oil output fell 6.11 per cent to 924,855 tonnes from 985,062 tonnes in May. This was the first decline in three months.

There is now the fear that such impressive gains could discourage India from lowering duties and delay China's decision to release import quota for the second half of the year. China's surging soyabean imports are likely to limit the country's demand for palm oil this year, which may delay the release of a new batch of import quota. Soya oil is a direct competitor to palm oil, which is mostly used in the instant noodle industry in China. Ample soyabean stocks may kill off hopes the country could, soon r elease quota despite expectations among Chinese traders Beijing would make a decision this week.

Meanwhile, narrowing spread between nearby and distant forward contracts, clearly signifies that demand in cash market is picking up. The benchmark futures contract September surged ahead and reached a high of 1,200 ringgits last week. The last day of th e week also witnessed profit taking ahead of the weekend. The way prices corrected on Friday suggest that, a retracement, downwards to a level of 1048, 995 and 950 ringgits can be expected next week. These are fibonacci retracement levels of 38.2 per cen t, 50 per cent and 61.8 per cent of the move from 790 to 1200 ringgits. Once, prices reach the 950 ringgits level, it is better to adopt a cautious approach . This level is a very strong support level and prices going below 950 looks bleak keeping in min d the overall bullish trend. A break below this level would signal a reversal in trend and prices could head southwards again.

RSI, is hovering in the overbought zone. This indicates that a correction downwards is due. The averages in MACD have not crossed over yet adding strength to the up trend. MACD is comfortably above the zero line in the indicator denoting a positive momen tum again. The current prices are way above the average price of short term and medium term again maintaining the bullish trend upwards.

Therefore, look for prices to test the important fibonacci levels next week before resuming the up trend. Crucial resistance levels at ringgits 1125, 1180 and 1200 and support levels are ringgits 1048, 995 and 950. The RSI (Relative Strength Index) usua lly tops above 70 and bottoms below 30. Once RSI reaches 70 and above the commodity tends to become overbought (and a correction is due) and when it reaches 30 and below it tends to become oversold (and a rally up side is due).

Divergences occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the RSI. Prices usually correct and move in the direction of the RSI. The MACD is the difference between a 26-day and 12-day exponential moving ave rage. A 9-day exponential moving average, called the ``signal" (or ``trigger'') line is plotted on top of the MACD to show buy/sell opportunities. A crossover of two moving averages can be used to signal buy/sell opportunities as the short term average c rosses over the longer term.

(The author is a Chennai-based technical analyst who tracks the international commodities futures markets. This analysis is based on historical price movement of the commodity concerned. There is risk of loss in trading.)