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Small Pullbacks Limit Opportunities
Malaysia Perspective | 15 June 2009

Kuala Lumpur Composite Index Futures (FKLI)
The stock market continued to be very bullish despite being oversold for quite some time. Pullbacks in the current uptrend rally were so small that many traders who waited for significant pullbacks were unable to ride on the current rally. Those who went short since the past few months were slaughtered. Those who traded on breakouts when the price created new highs could not gain high profits because rallies were small in the very short term.

Only those who could take a long position and hold for a longer period were able ride on this rally. The Composite Index climbed 24% since the low in March and is currently at an eight-month high at 1,044.41 points. The FKLI for June closed at 1,056.50 points at the end of May.

The current uptrend is strong as it could stay above the short-term 30-day moving average. The longer term 60- and 90-day moving averages are also increasing. The momentum of the uptrend was somehow a little weaker in May compared with the previous month. The RSI indicator continued to decline despite FKLI making new highs. The FKLI had been oversold since last month but market continued to go higher. This indicates a very strong bullish sentiment.

pullback1The current uptrend can be defined by an uptrend channel and this can be determined using the linear regression band since the rally began in April (See chart below). Trading short-term between the top and bottom bands is possible. A long opportunity can be found at the bottom band, which is currently around 1,050 points. A short opportunity can be found at the top band of the linear regression band which is currently around 1,110 points. However, a break below the bottom band may be an opportunity to go short. Longer term resistance level is between 930 and 950 points.

Market volatility has slightly decreased. The current three-period Average True Range (ATR) indicator is at 17.5 points while the average reading is about 19 points. The previous month’s ATR was 20 points. For those who are trading in the short term, a stop loss should not be placed less than 19 points, or better still a 1.5 times the ATR, which is 30 points. There is a high chance of you getting stopped out too soon if the stop loss is lower than the ATR.
Crude Palm Oil Futures (FCPO)
The price of FCPO climbed as high as RM2,799 per metric tonne in early May before correcting to a low of RM2,350 on 26 of May. The long term average was between RM2,200 and RM2,300 and these were the levels I expected the price to pull back to.

However, the price continued its upward movement and is currently at RM2,552. The rebound was likely due to revised forecasts made by palm oil experts like London-based Dorab Mistry of Godrej International who forecasted that the price of crude palm oil can go as high as RM3,000. Mr Mistry was less bullish earlier this year.

The price is currently in strong uptrend as it could stay above the short-term 30-day moving average. The weak momentum and overbought value in the price of FCPO caused a pullback in the middle of May to a low of RM2,350. Now the price is set to continue its upward trend.

pullback2An uptrend channel was developing since the rally started in early 2009 and this can be defined by the Linear Regression Bands. RM2,350 was at the bottom line of this band which was drawn from the peaks recorded on 7 Jan and 4 May. This band is still valid till today and the price is currently near the middle band.

There is a chance that price may move towards the top band again with the current bullish sentiment. The RM2,800 resistance level is highly likely to be tested again. The top line of the Linear Regression Channel is at RM3,000 and increasing. With a nicely established uptrend, traders can use these bands to trade at the top and bottom bands. The trader should also use other indicators to confirm trading at these levels.

The three-day Average True Range (ATR) is RM93 with the average around RM100. A stop loss should not be less than 100 points for short-term trading on the daily chart. A stop loss less than this is likely going to get the trader stopped out too soon. For a safer stop, the stop loss should not be less than a 1.5 times the ATR, which is 150 points.

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