CPO Futures Still on Southerly Course

OBSERVATIONS: The bear trap was sprung last week.

The

Kuala Lumpur CPO futures market dived towards the initial target of

RM2,400 a tonne in early trade last week, hitting a low of RM2,406

which is as good as having hit the RM2,400 target. Then, for no good

reason, the benchmark August 2010 contract did an about-turn, surging

to a high of RM2,501 before settling on Friday at RM2,491, up RM34 or

1.38 per cent over the week.

This market’s U-turn up the price

chart must have have come as a big surprise to many market participants.

And loud gnashing of teeth for those who, in their rush to cover

money-losing short (sell) positions, lost big time.

This

market’s performance was especially surprising, happening as it did in

the midst of last week’s meltdown in world stock and commodity markets.

Germany’s dropping of a regulatory hand grenade in world financial

markets last week – its unilateral ban on “naked short sales” of some

government bonds and financial institutions, which triggered a flight

from equities and downed commodity markets overall – is the latest cause

for global investor concern.

Crude oil for June delivery, which had fallen US$20 in less than a

month, slipped below US$70 a barrel. leaving many wondering why the

black goo has undergone such a dramatic price meltdown, despite the

giant oil spill in the Gulf of Mexico.

Even gold, the traditional

so-called safe haven in times of economic turmoil, was hammered. The

yellow metal, for June delivery, lost US$51.70 to US$1176.10 an ounce

over the week. And soyabean oil, the chief competitor to palm oil, also

fell, closing last week at 36.96 US cents a pound for July delivery on

the Chicago Board of Trade, down 0.55 US cents or 1.47 per cent over the

week.

But palm oil rose, against the global tide in world

commodity markets. Why?

There were technical signs suggesting

that conditions were ripe for squeeze-play on short position holders,

aka ” springing a bear trap”.

Readers may recall that, two

weeks back, this column drew attention to “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” and that “it behooves market players to beware of it”.

Though

some commentators attributed palm oil’s strength to the recent

better-than-expected export performance, the latest estimates were

really nothing to shout about. The average of Societe Generale de

Surveillance and Intertek Agri Services’ May 1-20 export estimates

amounted to 784,000 tonnes, only about 38,000 tonnes or 5.16 per cent

higher than that for the similar period in April.

Conclusion:

This market is still technically as bear.

The immediate

overhead resistance level is RM2,520, the point below which this market

could well rise to (don’t bet on that happening though) before this

market resumes its southerly course.



HOW TO USE THE CHARTS

AND INDICATORS

n 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.

n 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.

n

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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