Palm oil may test support level

Malaysian palm oil futures on BMD exchange fell lower reversing earlier gains as they took direction largely from other oil markets and possible food import tax changes in China. Prices this week have fallen around 7 per cent in volatile trading, on worries that prices had overrun the bullish fundamentals and profit-taking.

The benchmark notched its biggest weekly loss since August 2010. Talk of a possible cut in a range of import taxes in China was the catalyst for losses. China may reduce import duties for soyabean oil to 5 per cent from 9 per cent and cut soyabean import taxes to 1 per cent from 3 per cent, while keeping palm oil duties at 9 per cent.

CPO futures corrected lower in line with our expectations. As expected failure to hold support at 3,800 Malaysian ringgit (MYR) a tonne dragged prices lower towards lower to 3,650 MYR/tonne levels. Another important support lies at 3,625 MYR/tonne, which has held well twice in the past.

As illustrated in the previous update, failure to repeatedly break higher above the psychological 4,000 MYR/tonne levels could tire out the bull camp and lead to sell-off. Hope of any major bullishness is waning now. CPO futures could be bracing itself for a decline to 3,550 MYR/tonne or even lower to 3,375-3,400 MYR/tonne levels also being a Fibonacci retracement point.

Ideally, the market could complete a corrective sequence there and the next leg of bullishness could start from there. Resistances could now be seen in the 3,750-3,800 MYR/tonne range.

We believe the impulse that began from 1,427 MYR/tonne, which hit 4,486 MYR/tonne ended and a prolonged corrective move has possibly ended at 1,335 MYR/tonne. In the big picture, a new impulse began from 1,335 MYR/tonne and the third wave with a projected objective of 3,900 MYR/tonne has been met.

We could still be in a corrective wave ‘A” with targets near 3,400 MYR/tonne and not a new fifth wave impulse as anticipated earlier. RSI is in the neutral zone now indicating that it is neither overbought nor oversold. The averages in MACD are still above the zero line of the indicator indicating the bullish trend to be intact.

However, negative divergences are seen, which is a bearish sign. Only a cross-over below the zero line again could indicate a bearish reversal. Therefore, look for palm oil futures to test the support levels now.

Supports are at MYR 3,625, 3,555 and 3,420. Resistances are at MYR 3,695, 3,745 and 3,850.

(The author is the Director of Commtrendz Research and also in the advisory panel of Multi Commodity Exchange of India Ltd (MCX). The views expressed in this column are his own and not that of MCX. 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.)