Play for bigger price moves on smaller exposure levels

The markets witnessed a higher turnover last week as traders displayed a higher risk appetite for industrial commodities after the government announced its big-ticket reforms. The week-on-week market-wide turnover on the MCX rose by 7%. The market-wide open interest fell by 4%. The MCX turnover gainers during the week were aluminium, copper, gold, lead, mentha oil, natural gas, nickel, potato, silver and zinc. The open interest gainers were aluminium, cardamom, cotton, crude oil, crude palm oil, mentha oil and zinc. The US non-strategic petroleum reserves were higher by 2 million barrels at 359.1 million barrels. The strengthening rupee is likely to add to the volatility as the overseas price rise in commodities is muted by the domestic currency factors. Traders should preferably play for bigger price moves on smaller exposure levels.

Agri commodities
Mentha oil has failed to rally in spite of the initial bullishness last week as the bulls lacked the conviction to offer follow-up buying support on advances. The bulls should ideally be able to defend the Rs1,225-1,250 band if the counter is to witness any bounce in the weeks ahead. The momentum will turn bullish above Rs1,400 if the price rallies on the back of higher volumes and open interest expansion. Market internals indicate a 32% increase in turnover and a 2% increase in open interest.

Potato has seen a sharp decline in trader interest and must stay above Rs1,125 on a closing basis if the uptrend is to have any meaningful chance. Await higher tops-and-bottoms formations and then initiate fresh buys. Market internals indicate a 1% increase in turnover and a 3% decrease in open interest.

Metals
Aluminium has risen for the fourth consecutive week and that too on high volumes. While that is a welcome development, conventional studies seem to indicate an oversold level on the short-term charts. A technical pullback could occur anytime without a warning. Hold existing longs for now, desist from adding fresh long positions. Market internals indicate a 25% increase in turnover and a 38% increase in open interest.

Copper is nearing the all-time high on the MCX and that is a sign of optimism. Copper is acknowledged as a bellwether within the industrial metals space. It has maintained its leadership status as it showed high relative strength. Now, Rs466 may see profit sales as bulls book profits and lock in gains. Only a sustained trade above this last-mile resistance with higher volumes and open interest expansion would indicate a fresh momentum-driven buy trigger. Hold existing longs for now. Market internals indicate an 11 % increase in turnover and an 8 % decrease in open interest.

Gold has displayed a spinning top formation on the weekly candle charts as the open and close are near each other and the intra-week high and low were almost twice the length of the candle body. This marks a short-term indecision in the trend as the bulls pause for a breather. Only a breakout past the last weekly high with forceful volumes and open interest expansion would trigger a fresh buy. In case of declines, the bulls must defend Rs31,250 or the bears may attempt to push prices lower. The overall trajectory remains upward for now. Market internals indicate a 2% increase in turnover and a 1% decrease in open interest.

Nickel has seen a smart rally to head toward the previous swing high of Rs966 which may act as a near-term barrier. The short-term charts are indicating an oversold reading; part-profit-taking on existing longs is advisable. Hold remaining longs with a stop-loss at Rs942 on a closing basis. Market internals indicate a 21% increase in turnover and a 31% decrease in open interest.

Silver has seen a significant spinning top pattern on the weekly chart. Coming as it does after a sharp rally, it warns of a possible halt to the upthrust as the bulls booked profits at higher levels. The strengthening rupee will add to the profit-taking bias and curtail upthrusts. Fresh longs must be avoided till a breakout above Rs65,000 occurs forcefully. Market internals indicate a 13% increase in turnover and an 11% decrease in open interest.

Zinc too has seen an overbought reading on the short-term charts as the price rise has been swift and forceful. The possibility of a profit-taking phase cannot be ruled out as the bulls may encounter some resistance near Rs116. Avoid aggressive big-ticket buying till a forceful close above Rs116 is not seen. Market internals indicate a 40% increase in turnover and a 2% increase in open interest.

Energy
Crude oil has seen an increase in the US non-strategic reserves and a strengthening of the rupee, which may curtail the upside on Indian commodity exchanges. The price will have to stay above Rs5,425 for momentum players to justify a fresh buy. And a forceful breakout above Rs5,500  would be needed for strategic players to initiate fresh longs. In case of declines, they must defend Rs5,225, below which the decline may extend in the near term. Market internals indicate a 10% decrease in turnover and a 14% increase in open interest.

Natural gas has seen a smart rally from the 30-week exponential moving average and a sizable expansion in turnover, though the open interest shrank due to the impending expiry of the September series and price appreciation. Now, Rs145 is established as a swing low. As long as it holds, the possibility of further upsides cannot be ruled out. Market internals indicate a 42% increase in turnover and a 34% 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 commodities
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