Commodities

Palm oil to correct lower initially

Gnanasekaar T | Updated on January 19, 2018 Published on January 25, 2016


Malaysian palm oil futures on the Bursa Malaysia Derivatives ended higher supported by expectations of lower output and as market expectations covered their short positions ahead of a long holiday weekend. Expectations of a lower production in the coming months, rebounding crude oil prices and higher soya oil prices supported the CPO futures.

Output from Malaysia, the world’s No.2 palm producer, is seen declining in the coming months on lower seasonal trend and as the impact of the El Nino dry weather effect kicks in. A government body forecast Malaysia’s 2016 crude palm oil production at 20.1 million tonnes, up slightly from 19.96 million tonnes last year. However, Crude oil fell on continuing oversupply woes and profit-taking on Monday, reversing from early gains that followed a surge at the end of last week on short-covering and fuel demand triggered by freezing weather in parts of the northern hemisphere.

CPO active month April futures are moving in line with our expectations. As mentioned earlier, though the decline in the previous week looked to continue further, the trend still remains bullish and our favoured view expects support levels at MYR 2,400/tonne followed by 2,360-65 could still hold and prices could once again attempt to rise higher. Prices moved exactly as per expectations and we continue to hold the same view for the coming week as well. Supports are now seen at 2,410-20 levels. Only an unexpected decline below 2,385 could hint that the expected rise above 2,520-30 might not materialise. Such a decline could open the downside again targeting 2,375-85 levels or even lower to 2,350-65 levels. Favoured view expects a corrective decline to supports levels and then prices to rise again towards a technical objective near 2,630-40 levels in the coming weeks.

We will now reassess the wave counts, as prices have crossed over above 2,370-2,400. A possible new impulse looks to have started again. One of our targets at MYR 1,850/tonne was met. The rally from there looks very impressive. The current move could push higher towards 2,645 initially and then it could correct lower in a corrective pattern towards 2,310 or even lower to 2,250, and then subsequently rise towards a medium to long-term target at 2,900, which could bring this current impulse to an end. But, this is clearly a medium to long-term expectation and not to be mistaken for a short-term view. Any dips could prove to be opportunity to participate in the upcoming uptrend.

RSI is in the neutral zone now indicating that it is neither overbought nor oversold. As mentioned in the earlier update, the averages in MACD are above the zero line of the indicator hinting a bullish trend to be intact. Only a crossover again below the zero line could hint at a reversal in trend to bearish.

Therefore, look for palm oil futures to correct lower initially and then move up again.

Supports are at MYR 2,405, 2,375 and 2,350. Resistances are at MYR 2,455, 2,495 and 2,520.

The writer is the Director of Commtrendz Research. There is risk of loss in trading.

Published on January 25, 2016

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