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No clear trend yet in palm oil

Gnanasekar.T

Malaysia's palm oil futures closed the week on an uncertain note. A clear trend is yet to emerge in the palm oil market. The export figures for the month of May is expected next week and that might provide a near term direction. However, the uncertainty surrounding the Indian Prime minister, Mr Atal Bihari Vajpayee's statement to review duty hikes on palm oil remains the biggest challenge for the markets upside potential. The head of the state has promised to review duty cuts and there is optimism that it might happen soon. However, the duties were raised to protect the domestic industries and, therefore, even if a duty cut were to happen it might be very negligible.

World palm oil prices have fallen 30 per cent over the past 12 months due to oversupply following rising output in Malaysia and Indonesia. Rumours are doing the rounds that the Indian Government might impose a base price for import of edible oils which d id not seem to cheer up the Malaysian markets. Open interest, which is an indication, to the number of contracts open in the future is negligible in size indicating that market participants are treading cautiously and are not interested in contracting bu siness at these uncertain times. The benchmark futures contract is now August and it closed the week at 753 ringgits. As mentioned earlier a break of 740 Malaysian ringgits (MYR) would trigger a technical sell off. This being a very crucial near term sup port level.

Prices are making lower lows and lower bottoms and that is a clear indication of a downward trend in progress. If a break of 740 ringitts downwards happens palm oil could get back to bearish days again. However, a break of MYR 825 only would confirm a re versal in trend in the longer term. RSI is about to enter oversold territory. Though it is an indication of a reversal upwards, it might remain in oversold territory for a long time before the actual reversal happens.

There is no divergence in RSI and, therefore, expectations of any reversal upwards is less . MACD has crossed and inter twined. This signifies that both the short term and long term averages are equal and denotes indecision. The short term average of 9 E MA crossed over the longer term average of 25 EMA from above at 840 ringitts indicating a sell signal.

Again a cross over from below would signal a buy which is to be seen. In the coming week, the trend would continue downwards and a test of 740 ringgits is imminent. If broken could see further lows up to MYR 700. Crucial resistance levels are MYR 760 & 7 80. Support levels are MYR 740, 732 & 700.

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 si de 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 exponentia l 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 t erm average crosses over the longer term.

(The author is an 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.)