Beware – Bear Trap Ahead for CPO Futures

OBSERVATIONS: Beware the springing of a bear trap.

Such an

event may not necessarily happen. It may not even happen, But the

potential for such an event happening is there and it behooves market

players to beware of it – and take quick action either to make quick

gains or cut losses short if and when it should happen.

One

reason for the potentiality of such an event happening is the

substantial increase in the total open interest position last week – to

65,625 open contracts from the previous week’s 63,191 open contracts, a

notable 3.85 per cent bulge or 2,434 open contracts in the course of a

single week, while the benchmark July 2010 contract plunged to an

intra-week low of RM2, 484 a tonne.

Another reason is the

surprising resilience of this market in the face of an extraordinarily

thick raft of bearish news and developments (Greece’s debt woes and the

fear of contagion to other debt-ridden European Union countries, the

euro’s fall to a 14-month low and crude oil’s fall to a 11-week low

around US$77 a barrel, among others), not to mention intense jawboning

by market players and commentators about deterioration in the comodity’s

fundamentals in their attempts to talk down this market.

Despite the odds stacked against it this market, the active July 2010

contract managed tp claw back up above the psychological RM2,500 level,

settling last Friday at RM2519 for a loss of RM39 or 1.52 per cent over

the week. And despite the odds stacked against it, this market remained

ensconced within its short term RM2,470 to RM2,595 trading range, which

could be viewed as a sign of underlying technical strength.

Conclusion:

The springing of a bear trap, if it happens, would see this market

staging a strong technical rebound.

No one can tell what event –

or catalyst – will trigger off the bear trap, if it happens.

However,

if any event can trigger off the bear it trap, it probably will be the

Malaysian Palm Oil Board report on April trade data and end-April 2010

stocks, due out today.



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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