Charting Asia

Into the Frying Pan or Into Your Car?

Fill up the tank or heat the wok -- your car or your stomach? It's not a choice we usually expect to face, but welcome to a central inflationary dilemma.

Oil for Food takes on a new meaning with competing demands between the automotive and food industries for palm oil. Palm oil is an essential ingredient in biodiesel. A liter of biodiesel in car is a liter of cooking oil you're taking away from the kitchen.

The inflationary impact of rising palm oil prices is passed through the food-processing chain. Palm oil is an important ingredient in many baked and processed foods -- from cookies and bread, to candy and frozen apple pie crust. It hides under the deceptive heading of 'vegetable oils'.

Two features stand out when we look at the palm oil futures chart. The first is the sharp decline from peak highs in March 2007. The second is relatively low correlation between the trending behavior of the palm oil trend and the NYMEX Light Crude oil chart.

The palm oil contract is a soft commodity and subjected to seasonal patterns. Light crude oil does not have this feature so the trending behavior is different. We cannot use the NYMEX Crude Oil chart as a proxy, or leading indicator for the palm oil chart.

The steady rise in Palm oil prices during 2007 included a six-month sideways consolidation between 2,300 and 2,700. (This did not occur on the NYMEX Light Crude oil chart) The upper edge of this consolidation area sets a strong support area for the current retreat in price. The spike in palm oil prices starting with the trend breakout in October 2007 developed a blow-off top patternin March 2008. The dip below the long term group of (GMMA) indicated the end of the long uptrend.

The failure of the rally in late March 2008 confirms the start of a new downtrend. This rally peak also gave a reference point for the new downtrend line.

The developing rally has three resistance features to overcome before we can say a new uptrend has developed. They are:

The value for the weak support level, now a weak resistance level, at 3,400. The value of the trend line also near the 3,400 level. The upper value of the long term GMMA, currently near 3,500.

This triple combination of resistance points makes it more difficult for a rally to develop into a trend change. This suggests the pressure of rising prices is diminishing so our attention turns to defining the downside behavior.

The support level near 3,050 has been tested with a spike low on April 1. It provided support in December 2007 and January 2008. It acted as resistance in November 2007. This is a strong potential pause point in the downtrend. There is a strong probability this will act as a consolidation level and a base for a trend rebound. The rebound faces the same triple combination of resistance features. A successful break above these sets an initial upside target of 3,700.

The blow-off top is a buying climax. It develops as the end of a prolonged uptrend. It signals a change in the nature of the trend and shows a buying frenzy. It has three features.

The first is a dramatic increase in volume (this is a clear and unambiguous volume spike). The second is a dramatic increase in price (this is a bubble in price). The price activity near the volume spike is fast, and  rises well above the previous trend behavior. It may also include a substantial increase in the intraday volatility of price. The third is the failure to hold the highs of the day.

The blow-off top gaps above the previous day's close, and may rise even higher in the first hour of trading. However the rise is defeated by steady selling. The close is well below the open and near the day's lows. Often the range of the price bar is significantly larger than any preceding days.

The fast rise and its failure, shows that buyers have disappeared from the market. Sellers have to offer at lower and lower prices to achieve an exit. The close near the low of the day confirms buying and momentum exhaustion. The surge in volume is created by sellers as they become desperate to get out of the stock.

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