The benchmark Malaysian crude palm oil (CPO) futures contract has been on a steady rally since mid-September 2024. Prices have surged, fuelled by expectations of lower production following the peak harvest season and recent concerns over wet weather and flooding affecting output.
Additionally, the anticipation of stronger export demand ahead of key festive seasons has bolstered bullish sentiment. From a broader perspective, a significant technical breakout occurred on Oct 23, 2024, when prices breached the critical RM4,500 per metric tonne level, completing a parabolic bowl accumulation pattern. This bullish formation, which began in mid-2022, followed a sharp decline from the historic double-top pattern seen during the record highs of March and April 2022. Since the breakout, prices have climbed 15.6 per cent, reaching a local high of RM5,202 per metric tonne on Nov 11, 2024.
However, the rally experienced a temporary setback as bears pushed prices down between Nov 12 and Nov 22, 2024. Prices retreated to the 61.8 per cent Fibonacci Retracement level before rebounding, reflecting a classic technical move indicating the prevailing bullish sentiment. This pullback was primarily driven by profit-taking, which suggests a temporary retracement rather than a reversal of the overall upward trend.
Technical indicators remain supportive of the bullish outlook. The Moving Average Convergence Divergence (MACD) and its histogram on the daily chart signal that bullish momentum is still in play. However, traders should remain vigilant for potential bearish divergence indications as a warning sign of waning bullish momentum. Current technical indicators at the time of writing gave early cues to suggest that prices are attempting to make a decisive breakout and above the Nov 11, 2024, high of RM5,202 per metric tonne. This level will serve as a key pivot and determine whether the market will continue its bullish trajectory or shift towards a trend reversal.
A decisive breakout could extend the bullish trend, with the next key resistance level projected at RM5,560 per metric tonne. However, if prices fail to break and sustain above the RM5,200 per metric tonne level, traders could potentially see prices attempting to head towards the previous pivotal price level of RM4,500 per metric tonne.
Despite the bullish sentiment and technical signals, traders must remain cautious of the risks that could dampen the momentum. Palm oil’s record premium over its closest competitor, soybean oil, would impact its competitiveness. If the premium remains elevated, demand may taper off, exerting downward pressure on prices. Monitoring the spread between palm oil and other vegetable oils will be crucial to assessing price risks of crude palm oil.
Short-term dynamics such as weather conditions affecting production, currency fluctuations, and geopolitical developments will also play significant roles in determining market direction. These factors could influence the resilience of key technical support and resistance levels.
Amid a complex interplay of bullish technical patterns and market risks, Malaysian CPO prices appear poised to rigorously test the pivotal RM5,200 level. With strong support anticipated at RM4,500, traders should also brace for volatility while keeping a close eye on fundamental drivers and inter-commodity price spreads. As always, vigilance and adaptability will be essential in navigating the evolving CPO market landscape.
The writer is commodities strategist at Phillip Nova
