CPO Futures In Overbought Territory, Tipe For A Fall

OBSERVATIONS: The Kuala Lumpur CPO futures market is ripe for a fall. Or, at the very least, a technical pullback.

That’s because, after the recent 11.70 per cent sprint up the price chart, from the early July low of RM2,270 a tonne to last week’s high of RM2,535 within a three weeks, this market has overshot deep into technical overbought territory.

Indeed, the pullback may already have begun last Friday, when the actively-traded October 2010 contract emitted a technical reversal signal. That it did by settling at RM2,498 a tonne, below last Thursday’s closing price of RM2,519.

Most newspaper and newswire services cite palm oil as having followed the lead of crude oil and US soyabean oil futures markets. The usual – and facile – explanation was to put it down to the biofuel factor.

The technical evidence, however, suggests that this market rose on follow-though upward momentum, lifted by buying based on pure speculation, no real fresh buying interest, no interest to buy and hold for longer than it took to make a quick buck. It resembled a musical chairs game, with jumpy players ever ready to rush for the seats – or the exits in this case – the moment they sensed (or imagined they sensed) the music was about to stop.

The lack of real buying interest – or a buy and hold strategy – was evident from the 1,255-contract or 1.21 per cent drop in the total interest position to 68,218 open contracts from the previous week’s 69,473 open contracts.

Conclusion: Whether the imminent price pullback is just a technical correction to the recent rampage up the price chart – or the start to a new short term bear phase – depends on whether this market can hold its nose about the RM2,450 immediate support 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.


Source: Business Times by W.Q. Mun

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