Weakness in Rs likely to buoy prices; cut back on exposure levels

The markets witnessed a lower turnover week, as the traders displayed some caution on hard assets due to the volatility in the forex markets. The week-on-week market wide turnover on the MCX fell by 1%. The market-wide open interest rose by 4%. The MCX turnover gainers during the week were aluminium, copper, cotton, natural gas, nickel, silver and zinc. The open interest gainers were cotton, crude palm oil, mentha oil, natural gas, silver and zinc. The US non-strategic petroleum reserves were higher by 2.9 million barrels, at the 369.2 million barrel mark.

The weakness in the rupee is likely to buoy prices in the near-term and add to the froth in prices. Traders should cut back on exposure levels to avoid excessive risk to capital.

Agri commodities
Mentha oil has rallied on the back of accumulation at lower levels as the cyclical aspects of the commodity point towards a bullish bias. The Rs1,100 threshold will act as a support in the near term, and as long as the bulls manage to defend this level in case of declines, the upside potential remains greater than the downside. Market internals indicate a 8% decrease in turnover and a 3% increase in open interest.

Potato continues to decline as the bulls show no sign of entering on the long side in the near term. The counter is heading into the oversold zone and the near 50% decline from the peak is indicating a possible bottom formation in the weeks ahead. Await a reversal with higher volumes to initiate fresh longs. Avoid shorts for now. Market internals indicate a 49% decrease in turnover and a 5% decrease in open interest.

Metals
Aluminium has managed to pullback from lower levels and logged a spinning top formation on the weekly candle charts. This is indicative of a tug-of-war between the bulls and bears with a draw for results. The Rs102 level will need watching as a near-term support and any violation of this threshold on a closing basis will see the bulls being pinned down in the short term. Market internals indicate a 20% increase in turnover and a 14% decrease in open interest.

Copper has displayed a guarded but optimistic undertone, what with the bulls showing an abortive attempt to push prices higher. The Rs428 level will prove to be a support to watch out for, and any forceful close below this threshold will indicate a further potential decline. On the flip side, a sustained trade above the Rs444 levels will see a short -covering cum fresh buying momentum. Await a confirmed breakout before initiating fresh longs. Market internals indicate a 14% increase in turnover and a 7% decrease in open interest.

Gold has seen a muted rally due to the weakening rupee but for which the price would have declined in tandem with overseas markets. The anticipated rescue act in the euro zone is raising hopes of a risk-on sentiment in the near term, with a consequent compression in safe haven buying in bullion. Only above the Rs31,650 levels can momentum buying be justified to a degree. Unless a rally past this threshold occurs, avoid buying. Market internals indicate a 5% decrease in turnover and a 1% decrease in open interest.

Nickel has rallied from the previous swing low of `889 area and it should be construed as a short-term swing pivot, which should not be violated if the bulls are to have any chance of reviving the sentiments on the counter.

The higher volumes indicate a struggle between the bulls and bears and the `888 level should be treated as a stop loss on all existing longs. Market internals indicate a 28% increase in turnover and a 15% decrease in open interest.

Silver has declined for the fifth week in a row and the outlook remains cautious as safe haven buying has eased on the back of hopes of a euro zone bailout agreement. The overhead supply will imply a limited upside potential, rallies are likely to get sold into and bottom fishing should be avoided for now. Due to the impeding Diwali buying season, downsides maybe limited too. Market internals indicate a 1% increase in turnover and a 17% increase in open interest.

Zinc has fallen for the fifth week in a row and tested the previous swing low of `98 level. If this level is violated forcefully and closing is below this threshold, the price may stay below the `100 mark for an extended period. Avoid buying till a confirmed reversal is seen. Market internals indicate a 19% increase in turnover and a 42% increase in open interest.

Energy
Crude oil has rallied on the back of bargain-buying at lower levels and part of the price appreciation is due to the weakening rupee and the cost of carry being built into the price. The anticipated bailout of the trio - Spain, Greece and Cyprus - also aided sentiments  as traders expected a demand revision if these countries are bailed out. Volatility is likely to be higher and fresh longs maybe avoided for now. Market internals indicate a 7% decrease in turnover and a 39% decrease in open interest.

Natural gas has logged a higher top and bottom formation for the fifth week in a row as bulls offered buying support on declines. The impeding winter in the western nations typically triggers a demand expansion and the ongoing stress over Iran (with established 16% of global gas reserves) is another buoyant factor.

The Rs182 level needs watching as a near-term support which must not be violated if the optimism is to sustain. Market internals indicate a 14% increase in turnover and a 15% increase 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 recommended above