Tech_Trader88

FCPO | Weekend Market Updates & Analysis 20 Sept 2020

MYX:FCPO1!   CRUDE PALM OIL-RINGGIT FUTURES
Weekend Market Updates & Analysis 20 Sept 2020

1) Hello All, been a while since my last market updates on 27th March 20 when the market volatility was very high and the “Everything” sell off occurred. A few of you have been asking if I would restart my writings and thoughts of the market, and I too thought I should restart it. It helps me think through all of the factors affecting our palm market and also helps me sort through my thinking.

2) I am making a few changes to my market updates and analysis.
i. I will be covering more instruments that has an effect on palm prices
ii. While previously I kept the number of people receiving this report very small, I am planning to experiment with a blog style website which will be accessible to the public.

Let’s get into the analysis.

Where we are.

4) As of 18th Sept 20, Cpo has rallied strongly in line with Soybean / Soybean Oil’s rally in the USA on the report of strong China demand and bad weather effecting productions.

5) Personally, on top of these two factors, keep in mind that US-China has a trade deal where China has to buy an enormous amount of agriculture products such as Soybean from the USA.

6) So why buy now? For one, the dateline of the trade deal for this year is approaching. But I believe another bigger factor is the weakening of the USD vs the RMB. While a weakening USD is generally not good for regular people earning and spending USD, it is actually a stimulative factor for the economy because a weaker currency encourages and increases that country’s exports, while reducing imports, which will also reduce the trade deficits.

7) So if I were to explain why is China buying a lot more Soybean from the USA now? I would say it as a combination of trade deal agreement, weather effecting crops production, with an overarching weaker USD which makes it advantageous to buy USA exports right now.

8) Such a strong rise in the competing oils has also pushed palm prices up significantly. It only makes sense. If you are looking at SB / SBO rising 1.5-2% daily, would you be short the futures for palm? It would be suicide.

9) As the futures rise, physical would have to rise accordingly too.

10) Add the better local exports and static or slowly declining production for palm for Sept (and possibly all the way into the end of the year), and we are also moving into a seasonally bullish months (year end) for palm.

So, what’s next?

Monthly FCPO Chart

11) So far on the monthly chart, FCPO is still very strong. It is in a bull micro channel, where price never traded below the low of the previous month since May. Currently this month is a big bull bar, and we are testing the highs made in Jan 20.

12) Overall, price has been in a trading range since 2012 (3200-1900). Prices tested the high of this trading range in 2012 and 2016 and around 3150 made earlier this year in Jan, and current Sept is testing it too. Will price breakout from this 3200 range into 3600 or 4000? It is important to remember that most breakout fails within a few bars. However, we need to view that with other factors too which we will look at below.

13) So far, the buying pressure is strong and its being pulled towards the top of the trading range of 3150-3200 area. Sellers will not be selling much until we reach that magnet area, so we are seeing the buy vacuum effect heading up.

Weekly FCPO Chart

14) So far the weekly chart is in a small pullback trend, with a wedge pattern. Currently, we are in the 3rd push up of the wedge which tends to attract profit takers near the magnet targets above.

15) With that being said, from May until now, sellers has not been able to create any strong bear selling pressure as we do not have any consecutive 2 weeks sell off. This reflects a very strong bull and very eager buying of every dip.

16) So for the weekly, I can see a wedge pattern developing, as we head into the high of the 8 year trading range with the top of the channel also around the range of 3150/3200.

Daily FCPO Chart

17) So far on the daily chart , we see the same 3 push up, which is a wedge as we head towards the magnet top of the range above of 3150-3200. Question is, can price break 3200 non stop and continue to go up non stop?

18) If I look at Soybean and Soybean Oil ( SB / SBO ), they are also in similar price action in that, they are testing the top of the trading range since 2014, and making a double top with Dec 19/ Jan 20 highs.

19) Simply making a double top does not automatically mean prices are coming down. We have to look at all the factors together with these technical observations which I will cover below.

Monthly Soybean Chart

20) Soybean is in a strong rally which started in Aug and continuing in Sept for the reasons described above. It is currently testing the highs made in 2018, which is also the top of the trading range since 2014.

21) There was a break above the top of the trading range in June 2016, which failed on the next bar and price traded back into the trading range. Can Soybean break strongly above the 1074 top of the trading range and continue up strongly?

22) Again, most breakout fails, and we need to look at this matter in conjunction with other factors too.

Weekly Soybean Chart

23) Soybean’s weekly chart is in 1 single leg up to test the top of the trading range, which looks like a buy vacuum of price being sucked up to test the top of the trading range. It is climatic and usually it is not sustainable. However, due to the strong push up, prices usually can’t just reverse down unless the buy up is too extreme. Prices usually has to go sideways into a trading range before it can move down.

Daily Soybean Chart

23a. On the daily chart of Soybean , we see a strong rally from the second week of August, continuous aggressive buying in the first 10 days of Sept despite the global equities and crude sell off, and price has accelerate at a higher pace on the 16th, 17th and 18th of Sept.

23b. The buying is very strong with sellers unable to create consecutive bear bars and unable to trade below the low of the previous day on most days on the daily chart (micro channel) since the rally started around 11th August 20.

23c. However, we are fast approaching the top of the 7 year trading range and we have to see how price reacts there together with the other factors which we will cover below.

Monthly Soybean Oil

24) Soybean oil’s monthly is also testing the top of its 6 year trading range, and also Dec 19 / Jan 20 highs. The monthly chart has had bull bars since May until now, and currently Sept is also a big bull bar.

25) There are 8 more trading days to go, its unlikely that the price will reverse down to close as a bear bar. But a 5 month bull bar on the Soybean Oil chart is climactic and tends to attract profit takers at the top of the trading range.

Weekly Soybean Oil

26) On the weekly chart, you can see very eager buying and there has not been any consecutive bear bar since May 20.

27) Prices is testing the top of the 6 year trading range and the highs of Dec 19 / Jan 20. This is the 3rd push up for SBO , and this 3rd push up has 2 big legs, which tends to be climactic and tends to attract profit takers especially if price stalls near the top of the 6 year range around 35.50-36 area. Also take note that the last leg of a wedge tends to have 3 individual push up, which is a wedge within a wedge .

Daily Soybean Oil

28) On the Daily chart , we can see that price broke above the trend channel line at the end of August, but instead of reversing down, it went sideways and then up from 11 Sept onward. This current leg up has 3 pushes which is also a wedge pattern, and tends to attract profit takers.

29) The sideways consolidation from 27 Aug to 10 Sept is a good candidate for a Final Bull Flag .

Monthly Dalian Palm

30) Dalian monthly is currently testing the top of the 7 year trading range at around 6500. Price has 5 bull bars since May. Will price break above the top of the 7 year trading range of 6500? We need to see this in conjunction with other factors such as palm production, and other competing supply and demand factors as well as the currency markets.

Weekly Dalian Palm

31) On the weekly chart, we can see the same wedge pattern, similar to FCPO, and the current 3rd leg is big and strong.

32) But price is testing the top of the 7 year trading range, and it is a wedge pattern which tends to attract profit takers especially if prices stalls near the top of the trading range of 6500, and we have a strengthening of the USD vs RMB and the crop production and demand data comes out negatively.

Daily Dalian Palm

32a. On the daily palm olein chart, we can see a wedge pattern forming with the current leg forming the 3rd leg up.

32b. Prices are very strong with very aggressive bulls buying, and prices are testing the top of the 7-8 years trading range.

32c. We will have to monitor how prices behaves here, including the other factors that we will be covering below.

Some Observations.

33) Its important to note that prices for SB / SBO / CPO /Dalian has bucked the trend in Sept by going up, while global equities had come down. Even Crude Oil fell for the first 10 days of Sept, which will usually be bearish for Palm/ SBO prices.

34) During the earlier pandemic sell down in March 20, Palm/ SBO /Dalian followed the broader global markets drop and sold off as well. But this round, it did not. I attribute this current rally in SB / SBO to:

a. First phase of the Trade Deal to buy “an average” of $40 billion a year for the next two years in agricultural purchase targets. We are only in the first year now.
b. Weaker Dollar which makes buying Soybean cheaper which has causes a rally in SBO /Palm.

Above is the chart for the S&P 500 , which is currently in a pullback phase since the 1st of Sept.

Above is the chart for Crude Oil , which sold off in the first 8 days of Sept, but has recovered a lot of the move since.

35) Sept was a tough month. I had to decide if prices was going to follow the macro factors like it did in March when prices such as equities were at a major top, or the strong buying of sb / sbo /palm would continue. I choose to follow the macro factor of global sell off, which is not the right decision.

36) Hence from here onward, I will be reducing the co-relation factor for global macro, especially equities from my trading decision making factors.

Moving Forward for FCPO/ CPO

37) So, what’s next for our local market. Let’s look at a few factors.

a. SPPOMA looks to be coming in lower as we head into the end of the month.
i. Question: Is production beginning to taper off? General consensus is that production tends to trend lower towards these period of the year which is why this is a seasonally bullish quarter.
ii. Is it possible that due the the rising prices, FFB suppliers are not harvesting as quickly and keeping crops hoping for higher prices next month? I think there is definitely some who are doing this.

b. So far we are having a higher export figure in Sept vs Aug so there is increase in demand. Question is: Will the demand continue in Oct?

38) So looking at prices, I think it should continue to go and test the 7-8 year trading range highs around 3150-3200, and I will then see how prices behaves there.

i. If prices stalls, and we see traders start to take profits there and;
ii. Production in Oct is is much better than expected and;
iii. Demand is trending lower for the month (Oct),

then I think it is logical that we will see some profit taking near the top of this trading range area, as it also coincide with a wedge pattern in its 3rd push up.

But if we have a situation where:
iv. Production is coming off lower and;
v. Ringgit is weakening vs USD, RMB, Indian Rupee and;
vi. We also see demand more or less maintain the current levels or better;

then prices may be able to break above the trading range high of 3150-3200 and head on higher to the next level of resistance.

Currency Outlook

USD – Dollar currency index – DXY

39) So far, USD has been selling off since the high made in March during the start of the pandemic global sell off.

40 ) Currently price has found some support at around 93.00. If it is forming a wedge pattern, it looks like it is only in its second leg down.

41) Meaning, we have to monitor if price can break lower and form the 3rd leg down to around 89.00 to 90.00 area before we see any significant bounce.

42) So far prices is trading sideways since the end of July, which is a 1.5 months sideways consolidation, which also happens to be a good candidate as a final bear flag with another leg down to 89-90 level.

Above is the Weekly Dollar Index Chart.

RMB/USD Spot

43) RMB has been strengthening vs the USD since June. Price is currently trading around 0.14676.

44) From 1 Aug until 18 Sept, price has has rallied about 3.15% on the 16th of Sept, but has pulled back in the last 2 days of trading this week, with total gains since Aug at 2.8%

45) We have to see how price moves from here. If USD breaks down another leg, it will be a bullish factor for commodities such as SB / SBO which will also effect the prices of Palm as a competing oil because the Chinese Yuan will have more purchasing power vs the USD.

Above is the Daily RMB/USD chart. You can see the strengthening Chinese Yuan against the dollar since July.

MYR /RMB

46) Since the March lows, the RMB has weakend against the ringgit from 1.593 to current 1.6449 which is a -3.22% lower purchasing power of the RMB vs Ringgit.

47) Price has largely been sideways in the last 3.5 months and we are trading back to the July Levels. The Ringgit strengthened against the RMB on Friday. Should the Ringgit continue to strengthened, it is a negative factor for palm demand.

Above is the MYR / CNY pair. The higher the price is, the stronger the Ringgit is. A strong ringgit is not favorable to export/demand.

MYR / INR

48) The Indian Rupee has been weakening against the Ringgit since June 2019. Naturally a weaker Indian Rupee is not a bullish factor for palm prices.

49) The Indian Rupee is currently testing the top Oct 2018 price around 17.90. Should the Indian Rupee strengthened against the Ringgit moving forward, that would be a plus for palm prices.

Above is the daily MYR /Indian Rupee Chart. A higher chart indicates a stronger Ringgit, which is not a favorable factor for export/demand.

Summary:

50) So far, prices in SB / SBO /Palm/Dalian are all trading higher and testing its 7-8 year top of the trading range.

51) This is supported by better demand in SB / SBO from China and weather concerns as well as a weaker USD vs RMB which is favorable for China to buy USA Soybeans .

52) I would want to see what prices does at around 3150-3200 range. Will price stall or will price consolidate sideways first, then resume higher again or would price reverse down?

53) The answer to the above depends a lot on a few of these important factors:

i. Is the USD strengthening or weakening against the RMB? If strengthening, then it will cost more to buy SB / SBO and we might see a reduction in the buying spree there as a result which will dampen the strength in the rally. We need to monitor the USD/RMB pair accordingly.
ii. If USD weaken further, that will provide more support for prices of commodities (including equities and other commodities i.e precious metals) such as SB / SBO which might cause it to break further higher above the 6-7 years trading range top. So this is an important factor to watch.
iii. How is our production for palm moving forward in Oct? Higher? Lower?
iv. How is the demand outlook for Oct? Higher or lower vs Sept?

Other factors to monitor are also:

v. Is the RMB strengthening against the Ringgit? If Yes, that’s good for palm.
vi. Is the Indian Rupee strengthening against Ringgit? A stronger Rupee is good for palm while a weaker Indian Rupee is a negative for palm.

54) These are some of the factors I will be monitoring accordingly.

55) For now, we are entering the top of the trading range which are the targets for bulls, and I will monitor if price stalls at the prices of 3150-3200 and goes side ways or reverses according to what I have laid out in point 53 and point 60.

56) Usually after a big rally where we have a wedge pattern, and price is at a major resistance areas, we tend to see some profit taking because bulls who have been long since May are sitting on a lot of profits and would be looking to book some of the profits, and should price resume after a pullback, they can always buy the dip.

57) Looking forward at next month after such a big rally, especially at a major resistance area , it is logical for prices to experience some sort of pullback or sideways consolidation.

58) So we have to monitor the strength of the pullbacks accordingly. If the pullback is weak, it indicates that the buyers are still strong and controlling the markets and higher prices are likely.

59) If we see a strong pullback, then the sellers are starting to get active again, and longs would start to book their profits too. So we will have to monitor how prices behave after this 3rd spike up in Sept is done.

60) So to recap factors to see moving forward:
i. Is production increasing or decreasing in Oct for palm?
ii. Is the export figure increasing or decreasing for palm?
iii. How is the Dollar trading in relations to the RMB?
iv. What’s the weather situation like in the USA and the crops report? Higher or lower crops production? What is the Demand figure? Higher or lower?
v. How’s Ringgit trading in relation to RMB and INR?
vi. Are there any catalyst for change in prices for sb / sbo /palm?
vii . How strong are the pullbacks after the recent rally? Weak pullback = bullish
viii. How are the global macro outlook looking? (As I have mentioned above, I am reducing this as a factor in my decision making. However, it is also important to have the information as background info, but not use it as one of the main criteria for decision making.

61. Do note that on the monthly chart of FCPO, after every big rally, there is a month of consolidation. e.g. May rally, followed by June consolidation, July Rally, followed by Aug consolidation, and Sept rally, will Oct be a continuation bar or be another consolidation?

62. Keep in mind prices are trading near the top of a multi year trading range, which is a strong magnet and target area for the bulls. We do not know yet if they will start taking profits, or if they will continue to hold their longs.

63. For now, we will have to monitor the developing pullbacks after this move is done to have a good feel of the market moving forward, as well as all of the factors I’ve talked about above.

Thank you for reading and if you disagree with any points I have made, I encourage you to write back to me, and let me know your thoughts and we can discuss it and see which of our thoughts makes more logical sense.

Till the next update, trade safe.

Best Regards,
Andrew (Tech Trader)