Hard assets face rupee pressure, consolidation is taking hold

The markets witnessed a lower turnover week as traders displayed caution in energy and bullion at higher levels. The week-on-week market-wide turnover on MCX fell 2%. The market-wide open interest rose 4%. The MCX turnover gainers during the week were cardamom, cotton, crude, palm oil, gold, lead, mentha oil, natural gas and silver. The open interest gainers were aluminium, crude oil, crude palm oil, lead, mentha oil, nickel, potato and silver. The US non-strategic petroleum reserves, at 365.2 million barrels, were lower by 2.4 million barrels. The strength in the rupee is likely to weigh on the prices of hard assets more than agri commodities in the near future. Expect some consolidation in coming days.

Agri commodities
Mentha oil has seen a late spike due to expiry-related considerations, but is cyclically due for a bottom formation in the last quarter of the calendar year. The bulls must defend the 1150 level if that is to occur in the near term. A bullish confirmation will be if the price overcomes and stays above the 1225 level. Await a confirmed breakout before initiating fresh longs. Market internals indicate a 17% increase in turnover and a 1% rise in open interest.

Potato has witnessed a sustained decline as regulatory advisory and profit taking pulled prices lower. A decline to the 900 mark cannot be ruled out in coming week/s if the bulls are conspicuous by their absence. Avoid bottom fishing for now. Market internals indicate a 3% decrease in turnover and a 20% increase in open interest.

Metals
Aluminium has reacted lower in tandem with other industrial commodities and is likely to witness support at the 108 level which is a breakout point from a descending triangle. As long as the bulls manage to defend the 108 mark in the case of declines, the possibility of a revival in bullish sentiment should not be ruled out. Fresh buying is suggested only above the 115 level. Market internals indicate an 18% decrease in turnover and a 22% increase in open interest.

Copper has seen a corrective decline for the second week in a row and has closed below its support level of 442 which must be overcome on the upside if the uptrend is to resume. In case the price dips below the 430 mark, expect the price and/or time-wise correction to get prolonged. Market internals indicate an 8% decrease in turnover and a 9 % decrease in open interest.

Gold has reacted lower for the third week in a row as the bulls resorted to profit sales at higher levels and buying support was elusive from the smart money. The firming rupee and the news of the gold bond scheme has acted as a dampener on the price, which may see extended weakness should the prompt month series stay below the 31150 level on a sustained closing basis. Market internals indicate a 10% increase in turnover and an 8% decrease in open interest.

Nickel has closed at 7-month highs on the weekly charts and the open interest expansion indicates that the bulls are willing to buy-and-hold their longs for now. That the volumes have been marginally lower remains a mild concern which indicates a possible sideway consolidation in case the broader markets correct. Market internals indicate a 9% decrease in turnover and a 32% increase in open interest.

Silver is showing signs of profit taking as the price has slid for two consecutive weeks. The strengthening local currency is also likely to impact prices in the near term and the possibility of further declines cannot be ruled out. The case of lower prices gains momentum if/when the price of gold declines as well. Aggressive fresh purchases should be avoided for now. Market internals indicate a 1% increase in turnover and a 6% increase in open interest.

Zinc has declined for a fortnight as its peer group saw bulls unwinding. The immediate support is at the 105 level which is a critical near-term level to watch out for. Fresh momentum buying is advocated only above the 112 level. Await a confirmed breakout before buying afresh. Market internals indicate a 7% decrease in turnover and an 8% decrease in open interest.

Energy
Crude oil has slid lower for the second week in a row and has seen a slowing down of the downward momentum as bears pared their shorts on the back of a contraction in the US crude inventory. The 4675 level may act as a support in the coming week in case the decline extends. On the flip side, upsides are limited to 5075-5100 levels in the case of advances. The rupee will have a significant role to play in the near-term outlook. Market internals indicate a 19% decrease in turnover and a 13% increase in open interest.

Natural gas has seen a weekly closing at its 18-month highs which highlight the bullishness in the undertone. The expiry has seen a sizeable bullish gap which indicates a firm undertone in the offing. Hold a bullish bias and nurse existing long positions for now. Market internals indicate a 32% increase in turnover and a 4% decrease in open interest.

The columnist is the author of A Trader’s Guide to Indian Commodity Markets and invites feedback at vijay@BSPLindia.com.

Fair disclosure: The analyst has no exposure to any of the commodities discussed above