The Hindu Business Line : Palm oil futures may consolidate

MALAYSIAN crude palm oil futures on MDEX tumbled lower on Friday after a surprisingly weaker export data sent the market reeling towards its close. A corrective rebound seen in CBOT soya oil values however, continued to support CPO futures. A stronger overnight close Friday on CBOT will also help restore gains made during this week.

Both the export estimates for the period August 1-15 and August 1-20 were disappointing and led to a sell-off. SGS estimated Malaysian exports of oil palm products in the first 20 days of August stood at 725,922 tonnes, up 3.1 per cent from the 704,061 tonnes in the same period last month.

Strong exports are needed this month to curtail further inventory building. Private forecaster, Mr Ivan Wong issued an estimate on Friday that probably caused the slide. He said Malaysia's palm oil output in August would be 1.34 million tonnes, almost 6 per cent higher than the official figure of 1.27 million tonnes in July. He predicted palm oil stocks at the end of August of 1.37-1.38 million tonnes, up from the official figure of 1.02 million tonnes at the end of July.

The third month active contract moved higher in line with our expectations during the week but crashed lower towards the close. This move on Friday puts a doubt on the recovery as prices failed to overcome the psychological 1500 Malaysian ringgit (MYR) a tonne. Support should be seen at 1420 MYR/tonne followed by the psychological 1400 MYR/tonne level which is also the long term falling trend line support point.

A break below 1380 MYR/tonne will be very bearish for CPO futures. We still view the current move as a bullish correction in progress and look for the support levels to hold for an initial move to 1535 MYR/tonne level and possibly higher from there to 1615 MYR/tonne levels, which is the fibonnaci 38.2 per cent retracement level for the move from 2003 MYR/tonne to 1368 MYR/tonne.

One wave target near the 1365 MYR/tonne has already been met. The move to 2003 MYR/tonne is the end of the fifth wave impulse and a move lower from there is a corrective A-B-C pattern in the making. A new impulse from the low of 1368 MYR/tonne can be confirmed only after a daily close above 1520 MYR/tonne.

RSI is now in the neutral zone indicating that it is neither oversold nor overbought. A positive divergence is now seen where prices have made a lower low, which is not confirmed by a lower low in the indicator. The averages in MACD are very close to the zero line in the indicator suggesting a bullish reversal to take place. Only a crossover above the zero line will indicate a trend reversal.

Positive divergence is noticed in MACD too. Positive divergence in the indicators is one of the important reasons for our upward bias. Current prices are lower than the short-term 8-day EMA at 1448 MYR/tonne and the 34-day EMA is now at 1456 MYR/tonne. Look for prices to consolidate and test the support levels. Supports at 1430, 1410 and 1380 ringgits. Resistances at 1457, 1480 and 1535 ringgits.

(The author is associated with the Multi Commodity Exchange of India (MCX). The views expressed in this column are his own and not that of his employer. This analysis is based on the historical price movements and there is risk of loss in trading. He can be reached at gnanasekar_thiagarajan@yahoo.com.)

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