Plantation stocks may drop further

We have just sighted a death cross for the Plantation index- with the 10-week SMA line (equivalent to the 50-day SMA line) crossing below the 40-week SMA line (equivalent to the 200-day SMA line). The last time we witnessed a death cross for the Plantation index was in July 2008. See Chart 1 below.


Chart 1: Plantation's weekly chart as at July 6, 2010 (Source: Quickcharts)

The death cross for the Plantation index happened after CPO broke below its medium-term uptrend line support at RM2450. CPO's next support is at the horizontal line RM2000. See Chart 2 below.


Chart 2: CPO's weekly chart as at July 6, 2010 (Source: ifs.marketcenter.com)

The weakness in CPO coincides with the weakness in Crude Oil. We can see from Chart 3 below that WTIC has flashed a death cross!


Chart 3: WTIC index's daily chart as at July 6, 2010 (Source: Stockcharts)

Based on the bearish technical outlook of the Plantation index, we should reduce our shareholding of plantation stocks.

Note: I think the weakness in CPO is due to increased supply. During my recent class reunion, I was pleasantly surprised to learn that 4 of my classmates have ventured into palm oil plantation, each with estates of about 100-200 acres. I was also very surprise to learn that vacant agricultural land in my home state of Sabah can fetch a price of RM20,000 per acre. The gold rush effect has drawn many into the plantation sector, with the bulk of them venturing into oil palm cultivation. The ensuing increase in the supply would affect the prices of CPO for many years to come. I understand that plantation owners would lose money if CPO were to trade below RM1700 per tonne.