Reduce trade sizes, go with bullion for now as Iran issue simmers

The markets witnessed a lower turnover last week as traders kept away from fresh commitments in the industrial metals space even as safe-haven buying returned in bullion on the back of higher oil prices.

The week-on-week market-wide turnover on the MCX fell 4%, while the market-wide open interest fell 14%. The US non-strategic petroleum reserves at 340.7 million barrels were higher by 1.6 million barrels, but that did not dampen the bullish enthusiasm as the prices rallied for a third week in a row. The Iran issue will continue to be a directional guide for the near term. Initiate fresh trades in smaller lots and prefer to go with bullion for now.

Agri commodities
Mentha oil has overcome the Rs1,800 level, which is an indicator of an ongoing bear squeeze on the counter. Avoid shorting till a swing reversal bar is witnessed with the close near the lows.

Potato has railed for the 11th week in a row. The weekly closing is at its highest after delisting in October 2009, which underscores bullish undertone. Hold longs for now.

Sugar M Kol has seen a round of profit sales as the gains of the recent weeks proved unsustainable. The Rs2,800 level needs watching as a support and a consistent close below it will see the bulls being pushed on the ropes. Avoid fresh buying till the price rallies past Rs2,875 with high volumes and an open-interest expansion.

Metals
Aluminium has rallied smartly as supply-side constraint fears pushed prices higher. The metal is edging towards the crucial Rs112-113 band, which will be a last-mile resistance the bulls must overcome if the price is to rise in the coming weeks. That the price has rallied smartly on the eve of expiry of the February contracts is a sign of optimism and bulls may hold their existing longs and fresh longs may be added above the Rs113 levels on a sustained closing basis.

Copper has seen an inside pattern on the weekly bar charts and a ‘Harami’ pattern on the candle chart. These are indications of a truncation in the price range as the market prepares to make a larger move in either direction. A convincing breakout past Rs430 levels on a closing basis will trigger a short squeeze that can take prices to the highest levels seen in the calendar year 2012. Alternately, the Rs410 level is a threshold, below which the price should not decline, or else the outlook will weaken significantly.

Gold has rallied to close at its highest weekly levels after December 10, 2011, which shows bullish undertone. The safe-haven buying has returned with the oil prices rising on the back of geo-political tensions in the Middle East. The Rs28,200 level is a support that must not be violated if the upthrust is to sustain in the near term. The possibility of further upthrusts cannot be ruled out and existing longs may be held for now.

Nickel has exhibited an inside pattern on the weekly bar charts and a ‘Harami’ candle formation as the week’s range was constrained within the previous week’s range. These are indications of a consolidation process, and the bulls and bears will need to push prices in a breakout / drawdown beyond previous thresholds to trigger a fresh buy / sell. Await the confirmatory rally / decline beyond swing lows / highs before initiating fresh trades.

Silver has risen to close at its highest weekly close after September 17, 2011, which is a sign of optimism. However, the impending expiry of the March 5 contract may see the price spike up unduly as rollovers impact the price discovery mechanism in the coming three sessions. Any decline by Rs1,000 in the next month series will be a buy opportunity for the swing traders. A sustained trade above the Rs60,000 level in the next-month series may trigger a bear squeeze in the near term.

Zinc is another instance of an insider formation on the weekly charts as the bulls and bears paused for breath. Buying is not recommended till the `106 hurdle remains inviolate. Expect the bears to return with force if the Rs97 floor is violated. Await clarity in trend before taking fresh positions.

Energy
Crude oil rallied for the third consecutive week in the last week as the rhetoric between Iran and the West stepped up, pushing the political and speculative premiums higher per barrel. The Rs5,325 threshold is a critical one for the bulls to defend in case of a decline, and as long as this support holds the prices can rally higher. Hold longs.

Natural gas has witnessed a ‘Takuri line’ candle formation on the weekly chart after a fortnight-long upthrust, accompanied by a long ‘Shitahige’ tail, which is a sign of extreme caution for the bulls. Unless bulls manage to keep the price above the Rs135 levels consistently, fresh longs must be avoided for now.
 
The columnist is the author of
A Trader’s Guide to Indian Commodity Markets and
invites feedback at vijay@BSPLindia.com
Fair disclosure: the analyst has no exposure to any commodities recommended above