OBSERVATIONS: The Kuala Lumpur CPO futures market surged to a six-week high last week, lifted by a mad rush to cover short (sell) positions.
The third-month forward benchmark October 2010 futures contract touched a high of RM2,461 a tonne before settling last Friday at RM2,449, up a whopping RM149 or 6.48 per cent over the week.
The rush to cover shorts was evidenced by the notable contraction of 3,096 contracts or 4.27 per cent in the total open interest position to 69,473 open contracts, from the previous week’s 72,569 open contracts.
There was a fear factor in the rush to cover shorts in a big way – fear that the slew of good and encouraging news would continue to see print and in newswire reports. And concern that world commodity markets, especially the soyabean oil futures market, would extend the length of their past fortnight’s strong winning streak.
The bellwether US soyabean oil futures market extended its run-up the price chart last week, tacking on 81 points or 2.46 per cent to settle last Friday at 38.31 US cents a pound. Industry estimates of a 2 per cent drop in the September through November US soyabean harvest fuelled soyabean oil’s surge to a 14-week high.
The real catalyst for last week’s short-covering binge, though, was the latest export estimates. Societe Generale de Surveillance’s and Intertek Agri Services’ July 1-15 export estimates were figured at a combined average of some 688,000 tons, up a hefty 84,000 tonnes or 13.85 per cent from that for first half June.
It was not so much that exports have started picking up, but the realisation that Muslim countries in the Middle East and Pakistan have started buying palm oil in earnest to stock up on cooking oil ahead of the Hari Raya Aidilfitri (end-of Ramadan festive season) that really ignited last week’s rally. Hari Raya Aidilfitri, or Eid al-Fitr, is likely fall on September 10.
Conclusion: A rally ramped up by short-covering, no matter how strong, should not inspire confidence as the start to a real bull phase. What is needed is fresh and renewed buying interest, something not apparent – yet. Until that happens playing this market by ear may be the best – and probably only – option.
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