Wednesday, October 03, 2012
CPO approaching the psychological RM2000 mark!
This morning, we saw a sudden drop in the share price for Sime and the only news is that one of its indirect subsidiaries is going into voluntary liquidation. In the normal course of doing business, some companies are liquidated because the business is no longer viable or rewarding to justify its existence. Voluntary liquidation is nothing to fret about but when Sime's share price dropped, investors quickly joined the sell-off. The real reason for the drop in Sime's share price is simply because CPO prices have been dropping. This may come as news to some investors who they read in the Star newspaper that CPO plunged by 8.4%. I have posted that CPO downtrend may accelerated (here) after it broke its long-term uptrend. I have also posted on the economic rationale for a prolonged price adjustment (here). I believe CPO (closed at RM2083 per tonne yesterday) should find support at the horizontal-cum-psychological support of RM2000. This may not be the final stop for the current downtrend. If the RM2000 mark is violated, the next support levels are RM1700-1800 and then RM1400-1500.
Chart 1: CPO's daily chart as at Oct 2, 2012 (Source: iFS.marketcenter.com)
As for the Plantation index, the weekly chart shows that the index is still in a long-term uptrend line. The support from that uptrend line is at 7500- about 10% below the Plantation index of 8260 yesterday. If CPO can stage a rebound from RM2000 mark, the Plantation index should hold above the long-term uptrend line. Conversely, a breakdown of the RM2000 mark by CPO would likely be followed by a similar breakdown of the uptrend line by the Plantation index. The technical indicators for the Plantation index are mildly negative, with MACD entering the negative territory; RSI trending down; and, -DMI & ADX rising while +DMI dropping. With negative technical indicators present in the Plantation index, a breakdown of the uptrend line could easily trigger a sell-off similar to what happened in 2008.
Chart 2: Plantation index's weekly chart as at Oct 3. 2012_10.30am (Source: Quickcharts)
Based on the above, one should use the opportunity presented in any rebound to reduce his position in the Plantation sector. Avoid buying into the Plantation sector in the present weakness.