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This week, base metals and precious metals are likely to see further declines as the US dollar strengthens

The markets witnessed a marginal decline in traded volumes as falling bullion and energy prices compelled retailers to sit on the fence. The week-on-week turnover fell 3% on the Multi-Commodity Exchange (MCX) as trading in aluminium, gold, mentha oil, nickel and zinc counters nosedived.

However, there was a 40% spike in open interests, mainly due to contribution of silver, zinc, natural gas, mentha oil, gold, crude oil and aluminium.
This week, base metals and precious metals are likely to see further declines as the US dollar strengthens. Any further weakness in energy prices would be the primary trigger for unwinding on these commodities as the perceived demand destruction continues to spook the bulls.

Caution and restraint are advised while initiating aggressive fresh long positions.

Agri-commodities
Mentha oil witnessed a consolidation after a smart rally as the bulls paused for breath. The weekly charts indicate a gap on the way up between Rs 590 and Rs 603 levels, which may be bridged if profit sales on longs continue. The increase in volumes in the current month series indicate a tug-of-war between the bulls and the bears. So, momentum players should watch the Rs 640 level as a minor support, below which some declines may be seen. Bullishness will return above the Rs 700 levels. Market internals indicate a 26% decline in turnover and a 15% increase in open interest. This indicates a likely slackening in the turnover of the mid- and far-month series.

Metals
Aluminium is now trading comfortably below the Rs 124 level, where a rough and ready minor support was seen. Upon violation, this threshold will act as a resistance on upthrusts and unless the same is overcome, fresh bullishness will be elusive. The declines may test the Rs 115-116 levels in this week and bottom-fishing must be avoided on this counter. Market internals indicate a 37% decline in turnover and a 6% increase in open interest.

Copper has also seen a support violation in tandem with aluminium as the Rs 330 threshold has been violated on expanded volumes and increased open interests. Market internals indicate a 26% increase in turnover and a 5% increase in open interest — signs of fresh shorts building up. The Chinese abstinence from purchases will be the biggest dampener for this industrial metal and declines may test the Rs 294 levels in the coming fortnight. Avoid aggressive buying.

Gold has closed at its lowest since the weekend on May 10. This is a sign of pressure on advances as the main reason for its upthrust — inflationary fear — is abating. Since the yellow metal has closed below the Rs 12,000 threshold, it makes the chances of the metal touching the Rs 11,200 levels fairly higher in the coming weeks. Bulls should abstain till the metal starts to trade consistently above the Rs 12,300 levels with higher volumes and expanded open interest. Market internals indicate a 10% decline in turnover and a 37% increase in open interest — signs of fresh short build-up.

Nickel has witnessed an unabated decline as the Rs 725 level is the closest to a support that the bulls may expect in the coming weeks. The lower tops and bottoms formation continues relentlessly and the outlook remains bearish —barring a technical pullback due to short covering. Market internals indicate a 35% decline in turnover and a 13% decline in open interest — signs of mild short covering on declines.

Platinum continues to be relatively ignored by traders as gold is still their most favoured precious metal. The decline is in tandem with gold and the weekly chart shows a lower tops and bottoms formation as the decline gains momentum. Market internals indicate a 7% increase in turnover and a 5% increase in open interest as fresh shorts are opened up. Avoid buying for now.

Silver has witnessed a sharp crack in tandem with gold as the bulls failed to support the white metal. The major spike in open interest is worrying as the market internals indicate a 6% increase in turnover and a 137% increase in open interest — signs of massive short sales build-up. These are signs of higher volatility on this counter and traders need to curtail exposure on silver till clarity emerges in the absolute near term. Watch the Rs 20,850 levels as an immediate support for now.

Zinc is also traversing on a downward trajectory as the lower tops and bottoms formation continues unabated. The commodity is now trading at its all-time low on the MCX and the Rs 77 level will be the immediate hurdle on the upside, which needs to be overcome if the bulls are to return with strength. Market internals indicate a 34% decline in turnover and a 31% increase in open interest — indications of fresh shorts.

Energy
ATF has seen some buying emerging at the lower levels, though the counter is too illiquid and shallow to indicate reliable signals for now. The poor turnover needs to reverse so that the price discovery mechanism is robust. Till then, abstain from this counter. Market internals indicate a 58% decline in turnover and a 100% increase in open interest. On a low base, these numbers are almost meaningless.

Certified emission reduction (CER) witnessed an unwinding a fortnight ago and the Rs 1,230 level will be an immediate support level to watch out for. Should this level be violated forcefully, expect further weakness in the near term. Momentum players may buy only above the Rs 1,330 levels, that too if the turnover is higher and volumes expand. Market internals indicate a 49% decline in turnover and a 13% fall in open
interest.

Crude oil is likely to be the main pivot around which all the other commodities will revolve as far as sentiments are concerned. The Rs 4,775 level will be a support to watch out for in the near term and should this threshold be violated with force, expect further declines. The bulls are likely to get a respite only above the Rs 5,150 levels and a crossover above this hurdle must be awaited before fresh longs are initiated. Market internals indicate a 1% increase in turnover and a 8% increase in open interest — signs of fresh short build-up.

Natural gas has seen a steep decline as the counter tends to track movements of crude oil fairly closely. The Rs 335 levels may witness some rough and ready support that needs to be watched. Should the counter bounce from there on higher volumes and increased open interest, expect some advances. Till then, wait and watch. Market internals indicate a 22% increase in turnover and a 20% increase in open interest.

Mandatory disclosure —Theanalyst has exposure to goldfutures recommended above
vijay@BSPLindia.com