CPO Futures Technically a Bear Market

OBSERVATIONS: The Kuala Lumpur CPO futures market has morphed

into a bear.

But this bear is not going to make it easy for

market players – not even the bearishly-inclined – to make money.

Indeed, it looks likely that it will be a volatile bear, and therefore

likely higher unpredictable on a near term basis. And there will be

times when, like last week, it could fool some players into thinking

it’s more bull than bear.

The technical indicators had in the

previous week had pointed to this event – the morphing into a bear –

coming to pass and, in that respect, it was not a disappointment. The

decisive breakdown below the erstwhile RM2,520 a tonne support level in

early trade, and the subsequent plunge to a low of RM2,455, were the

technical signs that the bear had bared its claws.

Some market

commenters pointed to the Goldman Sachs fraud charge as a factor behind

the tremors in world stock snd commodity markets early last week. It

could well have been a contributing factor, though a minor one, to this

market’s plunge in early trade.

But what was unexpected was this market’s late surge, which not only saw

the actively-traded July 2010 contract recovering all it earlier losses

but also close the week at RM2,540 a tonne, up RM28 over the week.

True,

a technical rebound from the earlier sharp price falls was to be

expected; but not to the extent of topping the previous week’s closing

price. Market pundits attributed the spectacular rebound to speculation

that palm oil production has been, and will be, badly hit by the blazing

dry weather conditions over the past two months. But that certainly was

not evident from the latest Malaysian Palm Oil Board report, which put

March 2010 March output at 1,387,234 tonnes, up some 230,000 tonnes or

19.92 per cent from that for February.

Conclusion: This

market is technically a bear.

Based on that prognosis last

week’s late rally is either a technical rebound or a sucker rally – or

both. Besides, with the fall in the US soyabean oil futures market last

week, and the exchange rate at RM3.19 to a US dollar, the palm

oil-soybean oil discount has narrowed even further to 8 per cent, thus

putting more pressure on palm oil prices to fall – or soyabean oil

prices to rise.

This market, however, looks set for bouts of very

volatile trade, with wide and wild price swings the order of the day.

Which could make it highly unpredictable on a near term basis. For those

who can’t the heat, the best advice is: stay out of the kitchen.

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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