Be Prepared for Volatile Trading

OBSERVATIONS: The Kuala Lumpur CPO futures market ended 2009 with a bang on speculation that the drop in production of palm oil in December 2009 will outstrip the drop in export sales. The corollary is that end-December 2009 stocks will also be lower.

The actively-traded March 2010 contract surged to a high of RM2,666 a tonne before settling at RM2,663 last Thursday, up RM109 or 4.27 per cent over the week.

Much of last week’s upward thrust in price was due to short-covering, as evidenced by the notable contraction of the total number of open interest contracts to 81,268 contracts from the previous week’s 84,589 contracts. Although a bull run powered by short-covering could be viewed as suspect, what was of significance was the decisive breakout above the erstwhile RM2,625 a tonne overhead resistance level, signalling this market’s step-up to a higher price plane.

Market speculation is for December 2009 production to be lower by 14 per cent compared to the previous month, or by some 224,000 tonnes from Novermber 2009 output of 1.596 million tonnes. And for export sales to drop by some 13 per cent, or about 195,000 tonnes from November 2009 export sales of 1.5 million tonnes. The difference in the guesstimates between production and exports is about 30,000 tonnes, which should not make much of a difference to the still high level of stocks, save for a dramatic bulge in domestic demand. But you never know.

Market participants, however, will know for sure next week, when the Malaysian Palm Oil Board (MPOB) comes out with with its monthly report on December 2009 trade and end-2009 stocks data.

For the record, the local futures market’s benchmark third month forward contract gained RM968 or 57.11 per cent in 2009. The US soyabean futures market (the January 2010 contract settled end-2009 at 40.35 US cents a pound), by contrast, was up only by 189 points or 21.21 per cent, part of the reason why the discount of palm oil vis-à-vis soyabean oil dropped to as low as 10 per cent last week, from the norm of 15 per cent.

Conclusion: This market is likely to experience volatile trade ahead of next week’s MPOB report.

Although carry-forward upward momentum is likely to lift this market higher in early trade this week the volume complex and the open interest indicators do not suggest that the rally we saw in December 2009 is the stuff that real bull markets are made of.

In this regard caution should be the watchword as market players prepare to place their punts in this new year of 2010.

HOW TO USE THE CHARTS AND INDICATORS

THE BAR AND VOLUME CHART: This is the daily high, low and settlement prices of the most actively traded basis month of the crude palm oil futures contract. Basically, rising prices accompanied by rising volumes would indicate a bull market.

THE MOMENTUM INDEX: This line plots the short/medium-term direction of the market and may be interpreted as follows:

(a) The market is in an upward direction when the line closes above the neutral straight line and is in a downward direction when the reverse is the case.

(b) A loss in the momentum of the line (divergence) when prices are still heading up or down normally indicates that the market could expect a technical correction or a reversal in the near future.

THE RELATIVE STRENGTH INDEX: This indicator is most useful when plotted in conjunction with a daily bar chart and may be interpreted as follows:

(a) Overbought and oversold positions are indicated when the index goes above or below the upper and lower dotted lines.

(b) Support and resistance often show up clearly before becoming apparent on the bar chart.

(c) Divergence between the index and price action on the chart is a very strong indication  that a market turning point is imminent.

The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.

Source : Business Times

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