CPO Futures Brace For Pre-Holiday Weakness

OBSERVATIONS: The Kuala Lumpur CPO futures market sprung a bear trap last week. Many who got caught scrambled to cut loose by trimming money-losing short (sell) positions, thus triggering sharp price jumps. That, in market parlance, is called a squeeze.

And what a squeeze it was. This market, basis the third month forward contract, surged from an early low of RM2,488 a tonne to a seven-month high of RM2,628, closing on Thursday (the market was closed on Friday for a public holiday) at RM2620 for a RM90 or 3.56 per cent gain over the week.

Market talk had it that syndicates probably were responsible for the squeeze. The inordinate amount of market participants who had earlier turned bearish and had loaded up on short (sell) positions created a situation that made the market ripe for a squeeze. The syndicates exploited the situation, springing the bear trap by trading among themselves to jack up prices. The squeeze, as it was intensifying, prompted frantic stop-loss short-covering which ratcheted prices even higher.

If not for market talk that it was syndicates’ contrived trading up of palm oil futures prices, market watchers would have been hard put to come up with explanations for this market’s bullish behaviour last week, particularly considering that there appeared no strong fundamental reasons for the sharp price jumps. Stocks – the Malaysian Pam Oil Board (MPOB) put end-November 2009 palm oil stocks at 1,934,613 tonnes – are still high, and are expected to burgeon to even higher levels by the end of the year.

The month-to-date export performance was poor; export monitors Societe Generale de Surveillance (SGS) and Intertek Agri Services’ (IAS) combined average estimate for first half December totalled some 618,000 tonnes, down 78,000 tonnes or 11.0 per cent compared with that for the corresponding period in November 2009.

Conclusion: Although the present short-term uptrend, based on technicals, appears to be still intact, the market will have to contend with this seasonal factor: the tendency of a sell-off in commodity markets overall ahead of the long extended Christmas and New Year holidays as market players seek the safety of the sidelines

The pre-holiday season sell-off was already in evidence in US commodity markets last Thursday and Friday and weakness there could well be transmitted to the local market.

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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