More Downside to CPO Futures Market

OBSERVATIONS: Weighed down by the meltdown on global equity and commodity markets, the Kuala Lumpur CPO futures market plummeted below the psychologically significant RM2,000 a tonne level, a price not seen since early April this year.

The actively-traded September 2009 contract dived to an intra-week low of RM1,983, before recovering some on short-covering to settle last Friday at RM2,010, down RM165 or 7.59 per cent over the week.

Concerns that the world economy would sink into deeper recession sent global financial markets reeling last week. Crude oil slumped to US$60 a barrel, down from the week earlier level above US$70 (US$1 = RM3.57). The catalyst was the US government report that the unemployment rate there had surged to a 26-year high of 9.6 per cent.

Feeble attempts at rallies were undermined in part by the jawboning of a clutch of so-called “experts”, who have begun talking down this market. Until the previous week those “experts” have either been silent on the trend of this market or had still held bullish views. Now the overall “expert” opinion is that palm oil is likely to trade below RM2,000 a tonne on average for the rest of this year. The Malaysian Palm Oil Board (MPOB) report on June trade data and end-June stocks was neutral in its effect on this market. The MPOB put end-June 2009 stocks at 1,405,500 tonnes, up 34,262 tonnes or 2.5 per cent but well below market expectation of a 4.6 per cent increase in stocks.

News that India left import duties unchanged for vegetable oils, though welcome, could not lift market players’ spirits.

Conclusion: There should be more downside to this market, if the technicals are any guide. 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.


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