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Palm oil rise likely after correction

T. Gnanasekar

Malaysia's palm oil futures is trying to recover from a correction as several support levels were breached in quick succession. Market participants are divided over whether the current correction is over. Market needs much stronger demand, particularly f rom India, to reverse the current negative trend. As India, the world's largest importer of edible oils, is likely to step up palm oil imports from mid-September ahead of a major Hindu festival there is some glimmer of hope. Much depends now on the Hindu festivals.

There is also a talk of a possible physical shortage during the festival, which could again see prices heading up. Export figures released by cargo surveyor Societe Generale de Surveillance Malaysia earlier this week showed palm oil shipments to India in the first 25 days of August totalled 118,086 tonnes, down from 170,886 in July 1-25. India was Malaysia's main palm oil buyer in 2000, taking 2.03 million tonnes. India's edible oil imports from November to July stood at 3.49 million tonnes, up 16.3 per cent from a year earlier.

Prices could remain in the consolidation phase before posting another rally. Though, the sharp decline in palm oil inventory improved the market sentiment, it did not result in bullishness.

The November contract, which is now the active contract closed sharply down ahead of a holiday at the end of the week. Several support levels have been breached. We have been expecting a correction of this magnitude for the last several weeks. The import ant fibonnaci retracement levels of 38.2 per cent and 50 per cent have been tested. The most crucial 61.8 per cent retracement of the move from 815 ringgits to 1,305 ringgits is at 1,015 ringgits. This level should hold good as it is also close to the p schycological 1,000 ringgits mark. A break of this level should see bears returning again.

Technically, there are a lot of indications of prices going lower from the current levels. However, the medium-term to long-term still holds a lot of promise for the bulls. RSI is entered the oversold position. Though, this indicates a correction up ward s is due, it has the tendency to linger in the oversold area for a while before it turns up wards.

Using elliot wave analysis a technique used to forecast prices of commodities, we are now in the midst of a correction which is expected to end at 1,015 ringgits. Once the correction ends, we could see the up trend continue again. MACD crossed over few w eeks back showing signs of bearishness. Another cause for worry is that it has also gone below the zero line. This could add to the current bearishness. The current prices are getting closer to the short term average prices of 9 EMA and the long- term av erage of 50 EMA.

Once, prices go above the 50 EMA the trend could comfortably turn bullish again. Therefore, look for signs of consolidation at these levels before the up trend resumes again. Crucial resistance levels at 1,095, 1,115 and 1,206 ringgits and support levels are 1,055, 1,034 and 1,015 ringgits.

The RSI(Relative Strength Index) usually 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 sid e 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 average. 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 a verage crosses 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.)