A bull in hibernation

The long-term trend of the crude palm oil market is still a bull, gone into hibernation for now.

OBSERVATIONS: Players who returned to the Kuala Lumpur crude palm oil futures market last Wednesday in a holiday-shortened trading week (last Monday and Tuesday were Chinese New Year public holidays) were confronted with a slew of bearish developments and news - the plunge in the bellwether US soyabean oil futures due in part to the strength of the US dollar; crude oil's relapse to near US$40 a barrel; and poor export sales estimates.

Many market participants scurried for cover, liquidating long (buy) positions. Selling snowballed after the decisive downside penetration of the psychological RM1,800 a tonne level. The actively-traded April 2009 contract was sent reeling to a low of RM1,739, before recovering some on short-covering and profit-taking ahead of the weekend. The contract closed last Friday at RM1,779 a tonne, down RM 51 or 2.79 per cent over the week.

Players were particularly dismayed by the latest export sales estimates. Societe Generale de Surveillance' and Intertek Agri Services' January 1-25 palm oil estimates were on average lower by some 360,000 tonnes or 27 per cent compared to that for the similar period in December last year.

Industry concern is that the resumption of the downtrend in export sales will see stocks piling up again. End-December 2008 stocks were still a deadweight 1,994,681 tonnes, despite the record high 1.61 million tonnes of export sales in that month.

Conclusion: What last week's breakdown below the psychological RM1,800 has done is turn this market into a short-term bear.

And because the short-term trend is now a bear, and discretion being the better part of valour, market players would be well-advised to initiate short (sell) contracts but only at technical overbought positions below the immediate overhead resistance level, presently pitched at RM1,830.

But the long-term trend of this market is still a bull, gone into hibernation for now.

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.

The writer welcomes comments and feedback. He can be reached at mavernwqmun@gmail.com