CPO futures -- signals point to further downside

OBSERVATIONS: Dragged down by the avalanche on world equity markets and the slide on global commodity markets, the Kuala Lumpur CPO futures market turned from a short-term bull into a short-term bear last week after it broke through the downside of the erstwhile RM1,880-a-tonne short-term technical support level.

The actively-traded May 2009 contract rose at first to a high of RM2,017 on follow-through buying interest from the previous week. But it was downhill all the way after that, after heavy sell orders swamped the floor of this market. The April 2009 contract closed last Friday at RM1,835 a tonne, down RM160 or 8.02 per cent over the week, settling just a hair’s breadth above its intra-week low of RM1,830.

Not even a much improved export performance, attributed to a sudden and strong purchase orders from China, could help improve investor sentiment, despite export estimates meeting market players’ expectations.

Export monitor Intertek Agri Services put February 1–20 exports of palm oil at 794,286 tonnes, up some 56,000 tonnes or 7.60 per cent from that for the similar period in January. And Societe Generale de Surveillance (SGS) put exports for that period at 785,282 tonnes, up some 13,000 tonnes or 1.74 per cent.

And if candlestick chart patterns are any guide, there’s more downside ahead. That’s because last Friday’s trading action resulted in a Bearish Engulfing Pattern, a major bearish signal.

Conclusion: The next target is the RM1,745 immediate support level.

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