Exercise caution on fresh trades as volatility is expected to remain high this week

The markets witnessed a lower turnover week as the truncated week impacted trader participation levels. The nervousness in the base metals space also saw a crimping of volumes as the MCX witnessed a 15% decline in weekly turnover and a 3% decline in open interest.

The US non-strategic petroleum reserves fell by 7.3 million barrels to 357.6 million barrels, which saw crude oil getting buying cushion on declines. The week-on-week turnover gainers were aluminium, cardamom, chana, copper, crude oil, lead, natural gas, nickel and zinc. The weekly open interest gainers were aluminium, cardamom, crude palm oil, gold, mentha oil, potato and zinc. I maintain my previous week’s view that traders should exercise abundant caution on fresh trades as the volatility is expected to remain higher than average and shocks to trading capital may be high.

Agri commodities
Chana saw an inside formation as the weekly range was within the previous week’s range and the traders preferred to take intraday positions rather than over night calls. That is validated by the steep decline in open interest. The bounce back seems technical in nature and is sustainable only after the `2,420 hurdle is overcome on a sustained trading basis. Market internals indicate a 162% increase in turnover and an 89% decline in open interest.

Mentha oil attempted to resume its northward trajectory but has managed only an inside formation as the weekly range remains within the prior week’s range. A clear breakout above the `1,300 level on a closing basis will be needed to indicate a fresh upthrust. I do not suggest fresh buys in the interim, existing longs, however, may be held. Market internals indicate a 1% decline in turnover and a 6% increase in open interest.

Refined soya oil managed to hold on to its bullish pattern but will need to trade above the `580 level to signal the next phase of upthrust. The `550 level will be a floor support below which the bulls may lose their initiative. Hold existing longs for now and await a forceful breakout above the `580 level for fresh buy triggers. Market internals indicate a 20% decline in turnover and a 23% dip in open interest.

Metals
Aluminium witnessed a bout of profit taking as the metal fell to test the lower trendline of its bullish channel. Should the bears manage to keep the price below the Rs102 level, the counter can turn distinctly weak in the near term. Buying is suggested only after the Rs108 hurdle is overcome forcefully. Market internals indicate a 24% increase in turnover and a 5% increase in open interest as fresh shorts were added.

Copper declined in tandem with other base metals but managed to close off its weekly lows as bear covering cum fresh buying emerged on dips. It is crucial that the bulls manage to defend the Rs365 level at all costs if the uptick is to sustain, below this threshold, the possibility of fresh falls is not ruled out. Market internals indicate a 22% in turnover and 5% decline in open interest.

Gold managed to close near its previous week’s closing levels and the fall in turnover (after the truncated trading session is adjusted for) shows traders caution on this counter vis-a-vis silver which is continuing to out perform the yellow metal. As long as the bulls manage to keep the counter above the Rs19,775 level, the optimism will remain intact. Hold existing longs for now. Market internals indicate a 17% decline in turnover and a 2% increase in open interest.

Nickel remained one of the weakest base metal counter and is likely to test the Rs940 support in the coming week. Should the Rs940 floor be violated, expect fresh declines thereafter and a prolonged weakness in an already weak commodity in the near/medium term. Market internals indicate a 42% increase in turnover and a 17% decline in open interest.

Silver is back to its winning ways as the white metal is rallying back to test its previous top. The metal has shown higher relative strength vis-a-vis gold and has also broken out above its bullish channel.

The Rs36,750 level will be a near medium term floor which should be defended in case of declines for the medium term investors. For momentum players, the Rs38,250 level will be a trend determinator for short term long positions. Market internals indicate a 37% decline in turnover and a 2% decline in open interest.

Zinc showed signs of significant duress as the bull unwinding has been sharp and rapid. In line with nickel, this metal is now one of the weakest in the base metals segment and will need to trade above the Rs108 level to bring back the bulls in the ring. The rise in turnover and open interest indicate fresh shorts being built up and fresh longs are ruled out for now. Market internals indicate a 41% increase in turnover and a 13% increase in open interest.
Energy

Crude oil fell in line with the broader markets, despite the decline in the US non-strategic petroleum reserves by a whopping 7.3 million barrels. That speaks of the unwinding pressure that is likely to confront the bulls on upthrusts. Fresh buying is suggested only after the Rs3,880 hurdle is cleared convincingly and forcefully. Market internals indicate a 1% increase in turnover and a 27% decline in open interest.

Natural gas is showing signs of optimism as the winter approaches the western economies and the bulls manage to test the Rs200 level. Should the price hold above the Rs202 levels on higher volumes and open interest incremental, expect another upthrust of Rs5-7 in the coming week. Hold longs. Market internals indicate a 5% increase in turnover and a 29% dip in open interest due to the November expiry.

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

Mandatory disclosure: The analyst has no exposure to any of the commodities recommended above.