10/08/2010 (Bloomberg) - Palm oil may tumble by as much as 5 percent this week as the commodity is “extremely overbought” after gains on speculation La Nina may hurt harvests in the biggest producers and on drought damage to Russia’s grain crop.

Futures may decline to a range of 2,625 ringgit to 2,585 ringgit a metric ton as advances of this kind are often followed by a sharp reversal, Gnanasekar Thiagarajan, director of Commtrendz Risk Management Services Pvt., said in an interview. The 14-day relative strength index of the commodity is above 80, signaling “it was extremely overbought.”

“The correction won’t be very sharp as a lot of people who have not been able to join the recent rally will use any decline to buy into it,” Thiagarajan said by phone yesterday from Mumbai. “The July production and inventory data from Malaysia may act as a trigger for the correction.”

October-delivery futures jumped 69 ringgit, or 2.6 percent, to close at 2,730 ringgit ($868) a ton yesterday on the Malaysia Derivatives Exchange, the highest level since May 13, 2009. The vegetable oil, which has more than doubled in the past decade, surged 57 percent last year on demand from India and China, the biggest users.

Palm oil has rebounded 20 percent from an almost eight- month low on July 7 on speculation demand may increase in Asian nations and as futures track advances in crude oil, soybeans and equities. Harvesting in Malaysia, the second-biggest producer, may be disrupted in November and December as a La Nina event causes flooding in major growing areas, the country’s forecaster said last week.

Palm oil may climb to 3,000 ringgit by early September, Thiagarajan said. A steep decline may follow after Ramadan demand weakens and as output accelerates because of seasonality, before futures soar to 3,500 ringgit by December, he said.

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.