Canada Markets

Negative technical signals have presented themselves on the weekly December soybean oil chart. This price movement may have implications for Canadian canola prices, which are closely tied to vegetable oil markets due to the high content of oil in the seed.

As seen on the attached weekly chart for December soy oil, since November 2011, trade has taken place in a sideways trading channel, largely bound by a low at 48.75 cents/lb in mid-June and a 58.25 cents/lb top in early September. The top of this channel has been tested on two occasions to form a double-top formation which can lead to a reversal in trend. The first was on the week of April 9, reaching a high of 58.42 cents, the second on the week of Sept. 4 at a high of 58.25 cents.

A few rules are needed to confirm this as a double-top. First is that the first top must exceed the second. This is confirmed with the weekly April 9 high at 58.42 exceeding the weekly Sept. 4 high of 58.25 cents. The same logic must apply to volume, with volume on the first high exceeding that of the second high. This too, is confirmed, with the weekly volume at the second high being less than half that seen earlier at the April high.

The last rule that must be observed in order to confirm a double-top is that the lows must be breached. Today's close is the third consecutive close below the 48.75 lower boundary of the channel. This week's low of 48.25 cents is below the 48.75 low of the channel, while today's close is 48.62 cents, still holding below the lower boundary of the channel.

Since the onset of this summer's drought, soy oil has rallied 9.5 cents from a weekly low in the week of June 11 to a weekly high the week of Sept. 4th. When considering Fibonacci retracement levels, the chart shows negative price action by gapping lower through the 38.2% retracement level, then gapping through the 61.8% retracement level. Since then, the 100% retracement level of 48.75 cents is being tested in this week's trade. This week's low of 48.25 cents and today's close signal a breach of potential support from the 100% retracement level.

The same weekly chart also indicates some aspects of a head-and-shoulders topping pattern. The left shoulder was formed with a market top in the week of July 9 of 55.80 cents, indicated at Point A. Markets then retreated, before rallying to a second top at Point B. One of the characteristics of this pattern is that the volume at the head or the second high (Point B) is less than the volume at the left shoulder or point A, which is confirmed. After retreating from Point B, the market then rallies to a third high or right shoulder, represented on the chart as Point C. The pattern is completed with a breach of the downward-sloping trend neck-line which is shown at Point D. This week's trade thus far has led to this breach, which is a bearish technical signal should trade continue below the neck-line.

The forward curve for soybean oil also remains bearish given its upward-sloping line through to September of 2013. This is an indication of a bearish fundamental outlook of this commodity, with each successive future trading higher or at a carry, leading to a total lack of urgency exists in covering needs.

Meanwhile, crude palm oil in Malaysia, the second largest producer of the world's most widely-used oil, continues to grow due to good production prospects and weak demand. Stocks in Malaysia hit a record level of 2.48 mmt in September and these stocks have been forecast to grow to 3 mmt by January. According to the weekly continuation charts, soy oil hit a high premium of $383.32/mt over palm oil in the first week of October, but this premium has been eroded to approximately $320 US as of this week. Just the same, the longer term trend is a $100 premium, so soy oil continues to be well over-priced in relation to palm.

Recent trade reports have repeatedly suggested canola's current premium to soybeans is acting to limit the daily upside potential of canola price movement. This premium now stands approximately $45.50/mt, which is down from the recent high of $62.65/mt in mid-October.

Technical signals in the oil markets are not encouraging at present. Despite positive fundamental factors for canola, prices remain on the defensive and possibly for good reason.

Cliff can be reached at cliff.jamieson@telvent.com

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