CPO Futures : Vulnerable to Wide Price Swings

OBSERVATIONS: The “experts” hath spoken and Kuala Lumpur CPO futures market players have taken heed.

That apparently was why this market shot up last week, breaking out above the erstwhile RM2,515 immediate overhead resistance barrier on the upside last Friday on an unusually heavy turnover for the day of 10,412 contracts.

The actively-traded February 2010 contract was pushed up to a high of RM2,596 before settling last week at RM2,562 a tonne, a rise of RM80, or 3.22 per cent, over the week.

Much of the bullish action happened last Friday, after news of predictions by “experts” that the price of palm oil may soar to between RM2,800 and RM3,200 by June 2010.

The “experts” referred to are James Fry, managing director of London-based LMC International, Thomas Mielke, executive director of Hamburg-based Oil World and Dorab Mistry, head of vegetable oils trading with Godrej International.

These three “experts’ are mainstays at international palm oil conferences and they featured again at last week’s Indonesia Palm Oil Conference and Price Outlook 2010, held at the resort island of Bali.

James Fry based his prediction on strong export demand chipping down Malaysia palm oil stocks to 1.25 tonnes by June 2010, from 1.97 million tonnes as at end-October 2009; while Dorab Mistry thinks “it is conceivable that 2010 (Malaysian) crude palm oil production will turn out to be less than 2009 due to adverse weather conditions.”

Whatever their individual reasons all of them “experts”sounded a collective upbeat note, which was not shared by some local industry players who see palm oil stocks rising until the end of this year.

Conclusion: Although this market is technically still on the uptrack, last week’s knee-jerk reaction to “expert” predictions may not last if market participants recall their spotty record at predicting palm oil prices thus far this year.

The “experts”, it may be recalled, had at earlier conferences called for palm oil prices to hit RM3,000 a tonne by mid-August this year. That, of course, didn’t happen.

Moreover, the technical overbought position that this market had risen up to last Friday could render it vulnerable to volatile trade and wide price swings due to a combination of liquidation profit-taking and renewed buying interest.

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

Leave a Reply