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Last week proved eventful for markets as the anticipated rise in energy prices triggered a chain reaction across bullion counters. While I had expected crude to rally from $38 per barrel, the upthrust came marginally earlier. The effect on precious metals was instant and vigorous.

In terms of internals, traded volumes (week-on-week) on the Multi Commodity Exchange (MCX) slipped 4.5% after trading was curtailed by a holiday. Open interest was also lower by 3% as expiry of December gold and crude oil witnessed routine unwinding of positions. The volume gainers were crude oil and nickel, which saw higher turnover over the previous week. Open interest gainers were aluminium, chana, copper, gold, mentha oil, natural gas, refined soya oil and zinc.

This week will be an opportunity for volatility traders as the moves of Organisation of the Petroleum Exporting Countries (Opec) will be a trigger for energy prices, which will in turn impact bullion.

Agri-commodities
Mentha oil seems to be poised for an upthrust, provided the counter stays above the Rs 535 levels on higher volumes. The seasonal demand push is likely to keep the counter supported on declines in the near term. Bulls may initiate fresh longs only above the Rs 535 levels if the upmove is forceful and open interest expands. Market internals indicate a 2% decline in turnover and an 8% increase in open interest, indicating initiation of fresh longs.

Refined soya oil is likely to witness support at the Rs 438 levels and remain bullish above the Rs 465 levels. Having gained a re-entry into the traded list recently, traders should first let the price pattern of the commodity evolve before initiating any fresh trades. Market internals indicate a 60% increase in open interest.

Metals
Aluminium has seen an extended decline, though the velocity has eased week-on-week. Lower volumes indicate a sell-and-hold approach by players, which is unlikely to be a positive indicator for the bulls. The upsides, if any, will be laboured and will see overhead supply eroding gains abruptly. Market internals indicate a 21% decline in turnover and a 31% increase in open interest.

Copper has seen a decline during the week, though the closing is almost near the opening of the week. The “dragonfly doji” formation on the weekly charts indicates a marginal pullback, even if a slight bear covering is seen.

Though a complete trend-reversal is distant, any marginal pullback will provide a relief rally for bulls to unwind entrapped positions. Selling pressure will accelerate as the counter approaches the Rs 170 mark. Market internals indicate a 1% decline in turnover and a 1% gain in open interest as fresh shorts are built up.

Gold has hitched its wagon to the crude oil stars. Should there be an output cut by Opec and a decline in the US dollar, expect the bulls to feast on an upmove. The weekly pattern shows an “inside” formation as the weekly range was within the previous week’s range. For a decisive upthrust, the bulls need to take the counter past the Rs 13,065 levels on forceful volumes and with consistent trade. The charts indicate a rising bottoms formation, which is a bullish indicator. Buying is suggested on declines. Market internals indicate a 10% decline in turnover and a 36% increase in open interest, indicating a fresh bullish build-up.

Nickel has exhibited divergence from its base metal peers. The counter will have to trade consistently above the Rs 528 levels to indicate strength. Bulls may initiate fresh longs only above this trigger if the uptrend is on higher volumes and open interest expansion. A decline below the Rs 450 mark will see a fresh selling wave. Market internals indicate a 26% increase in turnover and a 33% decline in open interest.

Silver is likely to trail the pattern exhibited by gold, though a lock-step movement may not be seen. Bottoming out formation may be seen as long as the Rs 15,500 levels are not tested.

As long as the bulls keep the metal above the Rs 17,000 threshold, momentum/day traders may make short-term long-only trades as support will be seen on declines. Market internals indicate a 6% decline in turnover and a 9% dip in open interest.

Zinc has collapsed below the Rs 52 threshold and entered into uncharted territory in the near term. A test of the Rs 48 levels cannot be ruled out, especially if the US auto bailout falls through in the White House’s plans. Upsides will witness resistance at the Rs 55 levels, where longs are likely to be liquidated. Bulls should avoid this counter for now. Market internals indicate a 12% decline in turnover and a 38% increase in open interest, indicating fresh short build-up.

Energy
Crude oil has witnessed a relief rally ahead of the crucial Opec meet this week. Anticipating a production cut, bears have cut positions on declines. The financial year end in the overseas markets is also a trigger as bears wind up their exposure. Traders may note the open interest created all the way into the May 2009 series, which points towards a bullish probability. The Rs 2,050 level will be an established and activated support that needs to be watched. A sustained trade above the Rs 2,275 will be a buy trigger for the bulls. Market internals indicate a 6% increase in turnover and a 31% decline in open interest as shorts were squeezed ahead of the expiry.

Natural gas has seen a sharp decline, that too on strong volumes. That is in divergence with the crude prices.

The falling demand in international markets has triggered attrition in prices, which may slip lower unless positive economic data emerges to support a bullish view. Market internals indicate a 7% decline in turnover and a 14% increase in open interest, indicating fresh shorts.

The writer is a Mumbai-based investment consultant. He invites feedback at
vijay@BSPLindia.com.

Mandatory disclosure: The analyst has exposure to gold futures.