Short term: Up
Medium term: Up
Long term: Flat
R1 $2,800 psychological resistance
R2 $2,970 May 4 low
R3 $3,220 June 6 high
R4 $3,595.50 recent high
R5 $3,780 Jul 2007 high
S1 $2,667 July 5 low
S2 $2,600 psychological support
$2,430 200 WMA

BB – Bollinger band
Fibo – Fibonacci retracement level
HSL – horizontal support line
SL – support line
MACD – moving average convergence divergence
DTL – downtrend line
UTL – uptrend line
H&S – head-and-shoulder pattern
RSI – relative strength index

  • We have inserted a weekly chart to highlight zinc’s deteriorating technical backdrop.
  • The LME three-month price broke below the 100 WMA (see chart), which is now acting as overhead resistance. A potential bearish AB=CD formation suggests a target price of $2,600 per tonne.
  • If selling continues here, LME zinc is likely to test $2,600 per tonne and then the rising 200 WMA.
  • But the weekly chart suggests that the bearish AB=CD formation has run its course - a relief rally may be in store.
  • The daily chart suggests that zinc may have already found short-term support from the broadening trading pattern.
  • Dip-buying interest emerged at the July 5 low at $2,667 per tonne this morning after LME zinc touched the lower channel of the descending broadening pattern. 

Macro drivers
The presence of the dominant holder of 40-49% of the available warrants since June 25 suggest that metal is tightly held and lending capacity is likely to get limited. If short sellers want to roll over their positions, the presence of a dominant warrant holder might pressure those shorting the market. A pick-up in nearby tightness might prompt more short-covering, which could see prices pop higher.

Things have also improved at the micro level, with cancelled warrants rising to 32,750 tonnes as of July 5 from the June 26 low of 7,825 tonnes - perhaps due to rising physical demand. As well, there are cancellations for 3,875 tonnes of LME metal stored in Antwerp. Inflows have also dried up despite the persistent tightening in zinc’s cash/three-month spread, which was recently at a backwardation of $52.75 per tonne. LME stocks are at 249,025 tonnes.

Meanwhile, the July-August spread remains tight at $32.00 per tonne, putting pressure on zinc premiums in key trading regions. With the summer trading lull fast approaching, most market participants do not see any upside pressure, although the India zinc premium was an exception.

A solid close today could mark a potential technical reversal in LME zinc. If prices can continue higher, short sellers will be under pressure - a further tightening in the cash/three-month spread could see prices pop higher. But zinc remains in a descending broadening pattern - to regain its bullish allure, the metal needs to break above $3,200 per tonne.

Please click here for our monthly zinc spotlight.

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.