August 3, 2011 / 8:11 AM / 6 years ago

EU carbon oversold but could fall further

LONDON (Reuters) - The European Union’s benchmark carbon price fell to its lowest level in two and a half years on Wednesday and even though the market looks oversold there could be further downside, technical analysis shows.

Benchmark EU Allowances (EUAs) fell to a fresh 29-month low of 11.05 euros ($15.71) a tonne in mid-morning trade on Wednesday, amid heavy selling on fears of a double dip recession.

By 1133 GMT (7:33 a.m. ET), EUAs were trading slightly higher at 11.23 euros. Volume was heavy at 13,539 lots.

The contract is now more than a euro below its 14-day daily moving average line of 12.43 euros and around 2.35 euros below its 50-day moving average line of 13.71 euros.

The Relative Strength Index (RSI) on the daily chart has fallen below the 30 points mark to 28.176, implying an oversold market.

The RSI has fallen below 30 four times in the past six weeks. Each time was followed by a price rise.

“Most of the instruments show that selling is overdone. Now would be a good time to buy if you are thinking long-term about the future of this market,” an emissions trader said.

“But the market is still very bearish with a lot of people really selling heavily today,” he added.

Another technical indicator, the moving average convergence-divergence (MACD) signals, have crossed and are diverging further into negative territory, suggesting there may be further downside momentum.

The price has also broken below the lower Bollinger band and both the upper and lower bands have started to expand, implying increasing volatility in the market.

EUAs have fallen nearly 38 percent since the middle of March, after rising to 18.18 euros in the wake of the nuclear crisis in Japan.

Some traders on Wednesday said they expect prices to continue to fall as trading has entered a summer lull with little buying and because bullish news is not forthcoming.

Traders said they see the next technical support level at around 10.95 euros, followed by 9 euros.

Prices in the EU’s emissions trading scheme have languished after a sell-off in June prompted by Greece’s debt crisis.

($1 = 0.703 Euros)

Reporting by Nina Chestney; Editing by Anthony Barker

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