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Uncertainty in financial markets will cause extended flight to safety towards havens like bullion

The markets witnessed a sharp revival in turnover as traders celebrated the rally in energy and metals-both base and precious.

The week-on-week turnover on the MCX rallied by 25% while the market-wide open interest rallied by 4%. These are indications of higher trader interest and also the possibility of a resource shift from equities to commodities.

The week’s turnover stars were aluminium, crude oil, mentha oil, natural gas, zinc, gold and silver. The open interest gainers were aluminium, gold, silver, mentha and natural gas.

This concentration of trader interest is likely to persist as the uncertainty in the financial markets will see an extended flight to safety towards havens like bullion, and the weakness in the US greenback will see energy and base metals firming up further. Temptations to play a contrarian hand and shorting these hard assets must be curtailed.

Agri commodities
Mentha oil has extended its gains as the price appreciation has been significant on a week-on-week basis. The weekly closing has been at its highest since September 20, 2006. This is a bullish indicator. Market internals indicate a 96% increase in turnover and a 43% increase in open interest. We feel at least part profits may be booked on longs even at current levels as unwinding may be seen near historical highs.

Metals
Aluminium has closed at its weekly highest after May 13, 2006, which is a bullish indicator. That the traded volumes and open interest have ballooned only add to the positive picture. While profit sales cannot be ruled out for now, the overall undertone is likely to be positive due to the short covering on declines. Market internals indicate a 181% increase in turnover and a 47% increase in open interest. Hold longs.

Copper has turned tail and closed near weekly lows, which indicates weakness in the near term. The decline has been due to the China factor, which is likely to be a temporary phenomenon. The declines may test the 337 levels in the coming weeks and short covering may cushion the declines thereafter. The higher turnover indicates an active trader interest on the counter. Market internals indicate a 2% increase in turnover and a 12% decline in open interest as longs were liquidated. Avoid bottom-fishing for now.

Gold has closed at its highest on the weekly charts and that too with higher volume and interest co-relation coefficient. These are bullish signals for the players and indicate some more headroom on the upsides as the precious metal is poised to overcome the all-time high of 13397 in the current month series. The 13050 level will be a pivot point for the momentum players and a close below this threshold may witness unwinding. Market internals indicate a 14% increase in turnover and an 8% increase in open interest. Maintain longs.

Nickel has shown some support at the 890-895 levels as short covering-cum-fresh longs were witnessed. The near-term outlook remains tentative though the drawdown is likely to be curtailed. The upthrust may be sustainable only above the 980 levels on a consistent closing basis with forceful volumes. Market internals indicate a 6% increase in turnover and a 2% increase in open interest.

Silver has managed to close at its highest weekly close after March 15, 2008, that too with higher volumes. These are bullish signs and the precious metal is likely to remain firm in tandem with gold. The 25300-24900 band will now act as a support on declines.
As long as the metal trades above the 25600 levels, the outlook is expected to be firm. Market internals indicate a 7% increase in turnover and a 31% increase in open interest, indicating a fresh long build-up. Maintain existing longs.

Zinc has managed to recover from the anticipated 76 support and is likely to consolidate its gains in the near term. The bear covering may cushion the declines and keep the drawdown protected. As long as the counter trades above the 86 congestion level, the momentum players are likely to witness bullishness on the counter. Market internals indicate a 46% increase in turnover and a 27% decline in open interest. Avoid big ticket longs.

Energy
Crude oil has seen a remarkable recovery from lower levels as fresh tensions in the Gulf and uncertainty over Nigerian supplies spooked players. A weak dollar added to the asset price inflation and caused a bear squeeze. Domestic prices are likely to see a support base emerging at the 5850 levels, which may be maintained as a stop loss on longs.

Market internals indicate a 60% increase in turnover and a 17% decline in open interest due to the impeding expiry of the July series. The outlook will remain bullish above the 5990-6000 levels for the momentum players.

Natural gas has seen a profit-taking that has been sharp and sizable in magnitude. The decline may test the 490 levels, especially if crude prices turn soft. Avoid large scale fresh buys as of now. Market internals indicate a 96% increase in turnover and a 49% increase in open interest, indicating a fresh short build-up.

Mandatory disclosure - The analyst has exposure to goldand silverfutures recommended above
vijay@BSPLindia.com