CPO Futures Still A Bull Market – Barely

OBSERVATIONS: The Kuala Lumpur CPO futures market bull last week

took some heavy body blows, suffered a severe mauling and, to its

credit, survived – though barely.

The benchmark June 2010

contract plummeted in early trade on frantic liquidation of long (buy)

contracts, falling to an intra-week low of RM2,512 a tonne before

closing last Friday at RM2,528, down RM66 or 2.54 per cent over the

week. The reason this market is still considered a bull (technically) is

that it managed to keep its nose above water — the RM2,520 immediate

support level — due to last-minute short-covering.

But whether

this market will remain a bull in the near term depends on whether it

will continue to hold up against the expected — and continuing — barrage

of blows. Its chances, though, look slim to none.

This market

has been labouring under the weight (though this was not readily

apparent) of the strength of the ringgit for more than two months now.

The Malaysian currency, as recently as early February this year, was

trading in forex markets at around RM3.45 to a US dollar. Today, in just

over two months, it has strengthened to around RM3.18, a gain of some

7.80 per cent.

What this (ringgit strength) has done is shave the palm oil–soyabean

discount to a low of 10 per cent, down from the norm of 15 per cent,

rendering palm oil much less competitive vis-à-vis soyabean oil, the

world’s bellwether and No. 1 edible oil in terms of usage. Continuing

ringgit strength also could put a lid on palm oil prices, all other

things remaining equal.

And it — the uncompetitiveness of palm oil

against soyaoil — could be the factor behind the latest heavy blow to

the CPO futures bull: the crop’s latest — and most disastrously poor —

export performance.

The latest April 1-15 export estimates from

export monitors Societe Generale de Surveillance and Intertek Agri

Services add up to a combined average of some 492,000 tonnes which, not

only is lower than that for first half March by a whopping 162,000

tonnes or 25.0 per cent, but is also the lowest for the first half of

any month since January 2008.

Conclusion: Although this

market is still technically a bull the outlook is dismal because the

technical indicators overall for continuing as a bull look slim to none.

A decisive breakdown below the RM2,520 immediate support level would

confirm that this market has morphed into a bear.

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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