CPO futures market in consolidation mode

Depressed by the prospect of lower foreign demand for palm oil, due to the narrowing of the palm oil-soyabean oil discount, the Kuala Lumpur CPO futures market hit the skids last week. Its slide down the price chart was lubricated by crude oil’s meltdown to five-month lows under US$72 a barrel.

The benchmark July 2010 contract broke through on the downside the erstwhile RM2,470 a tonne support level before settling last Friday at RM2,457, down RM62, or 2.46 per cent, over the week

Reacting to scintillating May 1–10 export estimates and an official report that palm oil stocks fell as of end-April 2010, this market made attempts at rallies in early trade last week. But those early rallies fizzled out as the palm oil-soya-bean oil discount narrowed to 9 per cent (the norm is 15 per cent).

The narrowing of the palm oil-soyabean oil discount was a function of the strengthening of the Malaysian unit against the US dollar; it serves to diminish palm oil’s attraction vis-à-vis soyabean oil in world edible oil markets.

Soyabean oil is the world’s No. 1 edible oil in terms of consumption but palm oil is the world’s No. 1 oil in terms of world trade in oils and fats.

At the start of last week the ringgit was being swapped at around RM3.28 to a US dollar in forex markets. But it quickly strengthened, especially after Bank Negara Malaysia’s mid-week 0.25 basis point increase in the Overnight Policy Rate to 2.50 per cent. The Malaysian unit closed last week just above RM3.20 to a US dollar, a gain of some 2.4 per cent against the greenback in the course of one week.

Conclusion: Last week’s breakdown below the erstwhile RM2,470 support level signals this market’s descent to a lower price plane in the present phase of the bear market.

Next target: the RM2,400 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.