Bullion volatility set to surge, so tread cautiously this week

The markets witnessed a lower turnover week as traders displayed caution on industrial metals even as action perked up on bullion. The week-on-week market wide turnover on the MCX fell 4%. The market wide open interest fell 1%. Copper, crude palm oil, mentha oil and nickel were the top turnover gainers on the MCX during the week. The open interest gainers were cardamom, cotton, copper, crude palm oil, lead, mentha oil, potato, silver and zinc. The US non-strategic petroleum reserves were 0.1 million barrels lower at the 384.6 million barrel mark.

The rupee, meanwhile, is beginning to show signs of strength vis-a-vis the dollar and that may adversely impact the prices of bullion in the near term. Bullion traders are advised to tread cautiously as volatility is likely to spike northwards.

Agri commodities
Mentha oil has rallied strongly, and with a spike in volumes and open interest. Monsoon is a secondary season for demand expansion, but upsides are likely to encounter resistance and overhead supply from the trapped bulls is likely to calibrate the upmoves. Watch the Rs1,500 level for signs of resistance on advances. Market internals indicate a 41% increase in turnover and a 29% increase in open interest.

Potato has inched higher on a week-on-week basis, but on slim volumes, which indicates poor buying conviction at higher levels. A clear bullishness will be seen above the Rs1,125 level and bulls must defer buy decisions till the breakout occurs. Market internals indicate a 39% decrease in turnover and a 4% increase in open interest.

Metals
Aluminium has closed with minor gains on a week-on-week basis after a fortnight of declines. The weekly candle charts indicate a doji, which can be a sign of strength as long as the bulls manage to keep the metal above the Rs108 level on a sustained closing basis. Open interest and volume expansion in case of a price decline below this threshold can lead to further declines. Market internals indicate a 28% decrease in turnover and a 13% decrease in open interest.

Copper remains in a state of decline and the weekly candle chart indicates a spinning top formation as the bulls and bears were undecided in their trading patterns. Any sustained trade below the Rs400 mark will lead to further price erosion and only a breakout above the Rs425 level will rope the bulls back in the game. Market internals indicate a 16% increase in turnover and a 6% increase in open interest.

Gold has eased as the rupee is beginning to show early signs of strength vis-a-vis the dollar. This factor may exert downward pressure on prices in the near term and the Rs28,850-29,150 band needs watching for signs of support. Upsides can test the Rs30,750 level in the coming weeks if follow up buying persists and the rupee does not appreciate past the Rs54.50 mark. Market internals indicate a 15% decrease in turnover and a 34% decrease in open interest.

Nickel has gained on a week-on-week basis but remains precariously poised as a sustained trade below the Rs900 level will indicate a fresh bearishness in the metal. Bulls are advised not to bottom-fish if the price sinks below the Rs900 mark on higher volumes. The trend will reverse for the bullish above the Rs955 level, where the price must stay consistently to get into bull territory. Market internals indicate a 4% increase in turnover and a 17% decrease in open interest.

Silver has fallen in tandem with gold and the Rs56,300 level is now established as a resistance. The Rs52,500 level will be a firm support in the near term. A breakout past the Rs56,500 level will be a fresh buy trigger for mometum players. Await such a breakout before buying afresh. Market internals indicate a 4% decrease in turnover and a 12% increase in open interest.

Zinc is consolidating within the Rs102-106 band and the bulls will need to await a breakout above the Rs106 mark before initiating fresh buys. A close below Rs102 can trigger a fresh bout of weakness. Market internals indicate a 24% decrease in turnover and a 6% increase in open interest.

Energy
Crude oil appears to be near/in the oversold region as the price erosion in the last six weeks has been sharp. The Rs4,750 level will be a trend determinator of sorts as only above this threshold will the bulls get an upper hand over the bears. Sustaining below the Rs4,600 level will trigger a fresh round of declines. Market internals indicate a 2% decrease in turnover and a 19% decrease in open interest.

Natural gas has managed to arrest the decline in prices, but the Rs120 level will be a more meaningful support area to initiate fresh longs, subject to signs of accumulation. On the flip side, should the price appreciate before testing the Rs120 level, a confirmed breakout is likely only above Rs135 and if accompanied by higher volumes and open interest. Till then, postpone fresh buys. Market internals indicate a 14% decrease in turnover and a 4% decrease in open interest.

The writer is the author of A Trader’s Guide to Indian Commodity Markets and can be reached at  vijay@BSPLindia.com
Fair disclosure: The analyst has exposure to silver futures