CPO Futures Bearish, May Test RM2,100

OBSERVATIONS: Considering the raft of bearish news on the fundamentals for palm oil, it was surprising that the Kuala Lumpur CPO futures market managed to hold its ground for much of last week, putting on a much better-than-expected performance under the circumstances. But that resilience may not last, given the chart formation last Friday of a bearish engulfing pattern, a major candlestick bear signal which does not augur well for market participants still holding on to long (buy) positions.

This market spent much of last week in narrow range trade, and only weakened some last Friday on liquidation as some players sought the safety of the sidelines ahead of the weekend. The actively-traded November 2009 contract closed last Friday at RM2,145 a tonne, down RM52 or 2.37 per cent over the week.

The size of the fall did not appear commensurate with the overwhelming amount of bearish news.

The major bit of bad news was the much-anticipated Malaysian Palm Oil Board (MPOB) report on August trade data and end-August 2009 palm oil stocks, released last Thursday.

August exports dived to 1,316,466 tonnes, down a whopping 138,000 tonnes or 9.49 per cent compared to that for July 2009. Production was 1,494,764 tonnes, almost level with July’s output of 1,492,211 tonnes.

The upshot: end-August 2009 stocks, figured at 1,415,109 tonnes, burgeoned by some 83,000 tons or 6.22 per cent compared to the end-July figure of 1,332,182 tonnes. The palm oil stock level could have been much higher, if not for seasonal demand ahead of the Hari Raya festivities.

What’s more, the September 1-10 export estimate showed that last month’s trend of poor export offtake is likely to be extended to this month. Export monitor Intertek Agri Services put exports for the first 10 days of this month at 313,282 tonnes, down 53,000 tonnes or 14.50 per cent compared to that in the same period in July.

Conclusion: Because all the technical indicators, coupled with last Friday’s bearish engulfing candlestick pattern, point the palm oil price towards a southerly direction, this market could well fall this week to test the psychological RM2,100 level. 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.

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