The Hindu Business Line : Palm oil may correct lower

MALAYSIAN crude palm oil futures ended higher on Friday on expectations of strong bio-fuel demand from European Union and the US. Strong demand for palm oil as a bio-fuel in the light of spiralling crude oil prices, and the price advantage it enjoys against other competing oils is expected to underpin palm oil prices in the coming months.

The focus clearly is on energy prices in the coming months. Further confirmation to this trend, leading cargo surveyor Societe Generale de Surveillance (SGS) on Friday showed that EU nations bought a total 197,222 tonnes of Malaysian palm oil in September, about 16 per cent of the month's total.

Edible oil demand is also expected to pick up in the coming months as we enter the busiest periods for Malaysian palm oil exports as Pakistan, the West Asia and India import more products to prepare for the Ramadan and Diwali festivals in November.

The third month active front month contract moved higher as per our expectations. Now that we have seen a daily close above 1,448 Malaysian ringgit (MYR) a tonne, prices are set to rise higher towards 1,478 MYR/tonne initially and a daily close above this level should take CPO futures higher towards 1,545 MYR/tonne a technical objective.

However, be wary of a strong correction lower on the back of indicators lying in highly overbought territories. As mentioned earlier, an inverse head and shoulder pattern is in the making and the neckline has also been broken at 1,448 MYR/tonne further enhancing our bullish view.

The move to 2,003 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. The correction ended at 1,252 MYR/tonne. We are possibly in a new impulse with the first wave of the impulse ending at 1,504 MYR/tonne and the second wave in progress.

The third wave seems to have begun looking to target the 1,600 MYR/tonne levels ultimately. RSI is in the heavily overbought zone indicating a possibility of a correction lower. The averages in MACD are above the zero line in the indicator suggesting bullishness.

Prices are above the short-term 8-day period EMA at 1,439 MYR/tonne and the 34-day period EMA is at 1,406 MYR/tonne. Therefore, look for palm oil futures to test the resistance levels and then correct lower.

Supports are at 1435, 1423 and 1408 ringgits. Resistances at 1478, 1504 and 1544 ringgits.

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

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