OBSERVATIONS: The bear trap was sprung last week.
The
Kuala Lumpur CPO futures market dived towards the initial target of
RM2,400 a tonne in early trade last week, hitting a low of RM2,406
which is as good as having hit the RM2,400 target. Then, for no good
reason, the benchmark August 2010 contract did an about-turn, surging
to a high of RM2,501 before settling on Friday at RM2,491, up RM34 or
1.38 per cent over the week.
This market’s U-turn up the price
chart must have have come as a big surprise to many market participants.
And loud gnashing of teeth for those who, in their rush to cover
money-losing short (sell) positions, lost big time.
This
market’s performance was especially surprising, happening as it did in
the midst of last week’s meltdown in world stock and commodity markets.
Germany’s dropping of a regulatory hand grenade in world financial
markets last week – its unilateral ban on “naked short sales” of some
government bonds and financial institutions, which triggered a flight
from equities and downed commodity markets overall – is the latest cause
for global investor concern.
Crude oil for June delivery, which had fallen US$20 in less than a
month, slipped below US$70 a barrel. leaving many wondering why the
black goo has undergone such a dramatic price meltdown, despite the
giant oil spill in the Gulf of Mexico.
Even gold, the traditional
so-called safe haven in times of economic turmoil, was hammered. The
yellow metal, for June delivery, lost US$51.70 to US$1176.10 an ounce
over the week. And soyabean oil, the chief competitor to palm oil, also
fell, closing last week at 36.96 US cents a pound for July delivery on
the Chicago Board of Trade, down 0.55 US cents or 1.47 per cent over the
week.
But palm oil rose, against the global tide in world
commodity markets. Why?
There were technical signs suggesting
that conditions were ripe for squeeze-play on short position holders,
aka ” springing a bear trap”.
Readers may recall that, two
weeks back, this column drew attention to “the substantial increase in
the total open interest position last week – to 65,625 open contracts
from the previous week’s 63,191 open contracts, a notable 3.85 per cent
bulge or 2,434 open contracts in the course of a single week, while the
benchmark July 2010 contract plunged to an intra-week low of RM2, 484 a
tonne” and that “it behooves market players to beware of it”.
Though
some commentators attributed palm oil’s strength to the recent
better-than-expected export performance, the latest estimates were
really nothing to shout about. The average of Societe Generale de
Surveillance and Intertek Agri Services’ May 1-20 export estimates
amounted to 784,000 tonnes, only about 38,000 tonnes or 5.16 per cent
higher than that for the similar period in April.
Conclusion:
This market is still technically as bear.
The immediate
overhead resistance level is RM2,520, the point below which this market
could well rise to (don’t bet on that happening though) before this
market resumes its southerly course.
HOW TO USE THE CHARTS
AND INDICATORS
n 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.
n 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.
n
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
