OBSERVATIONS: The Kuala Lumpur CPO futures market bull last week
took some heavy body blows, suffered a severe mauling and, to its
credit, survived – though barely.
The benchmark June 2010
contract plummeted in early trade on frantic liquidation of long (buy)
contracts, falling to an intra-week low of RM2,512 a tonne before
closing last Friday at RM2,528, down RM66 or 2.54 per cent over the
week. The reason this market is still considered a bull (technically) is
that it managed to keep its nose above water — the RM2,520 immediate
support level — due to last-minute short-covering.
But whether
this market will remain a bull in the near term depends on whether it
will continue to hold up against the expected — and continuing — barrage
of blows. Its chances, though, look slim to none.
This market
has been labouring under the weight (though this was not readily
apparent) of the strength of the ringgit for more than two months now.
The Malaysian currency, as recently as early February this year, was
trading in forex markets at around RM3.45 to a US dollar. Today, in just
over two months, it has strengthened to around RM3.18, a gain of some
7.80 per cent.
What this (ringgit strength) has done is shave the palm oil–soyabean
discount to a low of 10 per cent, down from the norm of 15 per cent,
rendering palm oil much less competitive vis-à-vis soyabean oil, the
world’s bellwether and No. 1 edible oil in terms of usage. Continuing
ringgit strength also could put a lid on palm oil prices, all other
things remaining equal.
And it — the uncompetitiveness of palm oil
against soyaoil — could be the factor behind the latest heavy blow to
the CPO futures bull: the crop’s latest — and most disastrously poor —
export performance.
The latest April 1-15 export estimates from
export monitors Societe Generale de Surveillance and Intertek Agri
Services add up to a combined average of some 492,000 tonnes which, not
only is lower than that for first half March by a whopping 162,000
tonnes or 25.0 per cent, but is also the lowest for the first half of
any month since January 2008.
Conclusion: Although this
market is still technically a bull the outlook is dismal because the
technical indicators overall for continuing as a bull look slim to none.
A decisive breakdown below the RM2,520 immediate support level would
confirm that this market has morphed into a bear.
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
