Precious metal buying spree to continue; be cautious on energy, base metals

The markets witnessed a higher turnover week with improved participation. The week-on-week market wide turnover on the MCX rose by 4%. The market wide open interest fell by 13% as the impeding expiry on many counters triggered routine unwinding.

The MCX turnover gainers during the week were copper, crude palm oil, iron ore, lead, mentha oil, nickel, potato, refined soya oil, silver, sugar and zinc. The open interest gainers were aluminium, crude palm oil, iron ore, lead, mentha oil, nickel, silver and zinc.

The US non-strategic petroleum reserves were higher by 0.9 million barrels at 345.9 million-barrel mark. The rate by China and inflation control measures triggered profit sales on industrials.

The US jobs data brought safe haven buying back on the precious metals. I expect this momentum to extend in the coming week and recommend a cautious stance on energy and base metals segment. The impeding expiry of the prompt month contracts on the MCX will witness the usual unwinding pressures.

Agri Commodities
Mentha oil has seen a resurgence as the extended winter revives in buoyancy and the price is headed towards the Rs1,160 congestion zone. A sustained trade above this hurdle will trigger fresh buying that may scale higher. Hold longs for now. Market internals indicate a 13% increase in turnover and a 7% increase in open interest.

Potato has rallied as I had anticipated in the recent weeks. The rising tops and bottoms formation remains in place and the counter has closed at it’s highest after being re-listed on the MCX in December 2009. That speaks of the underlying strength and bulls need to hold their existing longs as higher prices may result in the coming weeks. Market internals indicate a 23% increase in turnover and a 11% decrease in open interest.

Refined soya oil has retraced from it’s short-term support at the Rs630 levels and bulls need to watch this level keenly in the coming days for a breakdown below, on forceful volumes and open interest expansion. Should such an event occur, fresh declines may ensue. Avoid fresh longs unless and until the Rs650 hurdle is overcome convincingly. Market internals indicate a 17% increase in turnover and a 41 % decrease in open interest.

Metals
Aluminium just about managed to close with paltry gains over the previous week as the bullish momentum survived the profit taking bias that was seen on it’s peer counters. Since the rally in aluminium has been muted so far, the selling too has been mild.

Watch the Rs111 level, below which the selling pressure may accelerate. Market internals indicate a 13% decrease in turnover and a 17% increase in open interest.

Copper has established and activated a resistance high at the Rs466 level and unless the same is overcome forcefully, the upsides are likely to be calibrated. The Rs440 level needs watching as a sustained trade below this threshold will trigger further weakness. Market internals indicate a 20% increase in turnover and a 7% decrease in open interest.

Gold has seen the third week of higher closes and that points towards a return of safe haven buying. The Indian demand remains strong and expectations of higher import duties on bullion may see the domestic prices remaining relatively firmer than the currency adjusted global prices. Hold existing longs for now. Market internals indicate a 8% decrease in turnover and a 1% decrease in open interest.

Nickel has rallied for the sixth week in a row and established itself as an outperformer in the base metals pack. The Rs1,275 level is acting as a crude support and every time the price declines to this level, fresh buying is expected to emerge. Hold longs and buy the dips near Rs1,280 as long as the decline is on poor volumes and open interest does not rise. Market internals indicate a 9% increase in turnover and a 8% increase in open interest.

Silver has yet again outperformed gold as the strongest performer in the metals pack and the near-term support is currently at the Rs46,500 levels. As long as this floor holds, the bulls are expected to have an upper hand in the near term. The impeding expiry of the prompt month futures may see some volatility as the usual end of account considerations cause a pull and push. Hold longs for now. Market internals indicate a 10% increase in turnover and a 7% increase in open interest.

Zinc has seen an inside formation on the weekly charts and appears to be on the cusp of a breakout that can lead to an impulse wave propelled by short covering cum fresh buying, subject to a crossover above the Rs115 levels with a spike in volumes and open interest expansion. Fresh buying by momentum players is recommended above a confirmed breakout. Market internals indicate a 26% increase in turnover and a 16% increase in open interest.

Energy
Crude oil has bounced back from lower levels as the increase in the US non-strategic reserves have been less than anticipated. The dollar eased mildly vis-a-vis the global currency basket and aided buying momentum marginally. The weekly candle charts indicate a bullish “daki” formation and that has bullish implications for the absolute near term. Declines near Rs4,050 levels may see some fresh buying and should such support be evident, higher risk traders may venture small ticket buys. Market internals indicate 14% decrease in turnover and 71% decrease in open interest.

Natural gas has played true to character and fallen in an inverse correlation with crude oil prices. The outlook remains weak and the Rs170 level assumes significance as a rough and ready immediate support to watch out for. Should this support be violated forcefully, expect deeper cuts in prices. Avoid bargain hunting. Market internals indicate 12% decrease in turnover and 9% 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 no exposure to commodities recommended above.