Proceed with caution as market volatility may be on the rise in the near term

The markets witnessed a higher turnover week as the traders participated in the volatility due to geo-political tensions. The week-on-week market-wide turnover on the MCX rose 30%. The market-wide open interest rose 4%. The MCX turnover gainers during the week were aluminium, cardamom, crude oil, crude palm oil, gold, lead, mentha oil, nickel, refined soya oil, silver, sugar and zinc.

The open interest gainers were aluminium, copper, crude oil, crude palm oil, gold, iron ore, lead, mentha oil, nickel, refined soya oil and zinc. The US non-strategic petroleum reserves were higher by 2.5 million barrels, at the 348.9 million barrel mark and perceived demand destruction at higher levels saw profit sales on the counter. Traders are suggested to proceed with caution as volatility may be on the rise in the near term.

Agri Commodities
Mentha oil continues to move within a symmetrical triangle and the lack of trader interest is resulting in a contracting price movement on a week-on-week basis. Such patterns are likely to result in a bigger price move once the prices expand in either direction and traders must be ready to act in such an event. Watch the Rs1,170 and Rs1,075 levels as inflection points beyond which sizable moves may occur. Market internals indicate a 14% increase in turnover and a 2% increase in open interest.

Potato has witnessed an inside formation on the weekly charts as the recent decline was reversed in the week gone by. Whether the bulls would manage to build upon their initiative will depend upon the counter staying above the Rs685 levels in the April 2011 series. Watch the Rs625 levels below which the decline can resume again. Market internals indicate a 8% decrease in turnover and a 7% decrease in open interest.

Refined soya oil has declined and validated the falling channel even further as the lower tops and bottoms formation extended over a month. Bulls will get a buy signal only after the 645 hurdle is overcome forcefully and till then, fresh longs maybe avoided. Market internals indicate a 19% increase in turnover and a 33% increase in open interest.

Metals
Aluminium has declined on profit sales as the entire base metals pack witnessed some unwinding. The Rs111 level needs watching as a support as a consistent trade below this level will result in a further slide. Bulls may expect relief only above the Rs115 levels. Market internals indicate a 47% increase in turnover and a 51% increase in open interest.

Copper has established a head and shoulders top on the daily charts and the price has violated the neckline. The upmoves are likely to encounter unwinding as the longs trapped at higher levels unwind. Only a sustained trade above the Rs430 levels can redeem the bulls and trigger a fresh buy. Till such an event occurs, avoid fresh longs. Market internals indicate a 51% increase in turnover and a 7% increase in open interest.

Gold has witnessed a spinning top formation on the weekly candle charts, which indicates a balance of power between the bulls and bears in the immediate future. Unless the Rs21,175 level is overcome and sustained forcefully, fresh buying is likely to be counter productive. As long as the price stays below the Rs20,800 levels, expect pressure in the absolute near term. Market internals indicate a 9% increase in turnover and a 5% increase in open interest.

Nickel has logged steep weekly losses of a magnitude that were seen only in May and June 2010. The Rs1,140 level needs watching as a rough and ready support as it indicates a retracement pattern as per Fibonacci studies. As long as the bulls are able to defend this level in the coming week, a pullback relief rally can be expected. Market internals indicate a 49% increase in turnover and a 23% increase in open interest.

Silver has exhibited choppiness as the bull / bear tussled resulted in a decisive victory for the bulls but the safe haven buying must continue and the price must rally past the Rs54,700 levels to build upon the recent gains. The likelihood of profit sales in the absolute near term cannot be ruled out and the Rs51,500 levels must be watched as a sign of support. Market internals indicate a 41% increase in turnover and a 13% decrease in open interest as short term players locked in gains.

Zinc has logged one of the sharpest dips in the base metals segment and a sustained trade below the `100 levels will imply fresh weakness on the counter. A clear bullish mandate will be above the Rs110 level and fresh momentum buys maybe initiated above this level only. Longer term players may await dips below the Rs95 levels before initiating fresh buys. Market internals indicate an 82% increase in turnover and a 49% increase in open interest.

Energy
Crude oil has reacted lower as the weekly charts indicate a bar reversal on the weekly charts. The demand destruction at higher levels, coupled with the demand contraction from Japan, has seen the bulls scurrying to lock in profits. The Rs4,750 level will have to be overcome forcefully to trigger the next round of bullishness and till then, fresh buying is not advocated for momentum players. On dips, a sustained trade below the Rs4,500 levels will indicate a continued weakness. Market internals indicate a 10% increase in turnover and a 2% increase in open interest.

Natural gas has expectedly moved in an inverse correlation with crude oil and managed to log mild gains. Follow up buying is required to build upon the recent gains. Should the Rs165 level be violated on declines, it will trigger a sharper fall as a head and shoulder will be confirmed. Market internals indicate a 10% decrease in turnover and a 26% decrease in open interest.

The columnist is author of A Traders Guide to Indian Commodity Markets and invites feedback at vijay@BSPLindia.com or (022) 23438482.

Mandatory disclosure: The analyst has exposure to Zinc futures.