NICKEL TODAY: Price recovery stops short at 200 DMA

 
Short term: Up
Medium term: Flat
Long term: Up
Resistances:
R1 13,464 200 DMA
R2 13,610 20 DMA
R3 16,690 Apr high
Support:
S1 13,000 psychological support
S2 12,828 Mar low
S3 12,770 recent low
Stochastic:
Bearish
Legend:

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

Analysis
  • The three-month LME nickel price managed to recover most of the losses made on Wednesday August 15 in its knee-jerk reaction lower.
  • But the rebound on Thursday stopped just below the 200 DMA, which is now acting as overhead technical resistance this morning (see chart).
  • Still, the technical indicators have not turned too bullish yet, with the daily RSI and stochastic lines unable to determine a directional bias.
  • Should the 20 DMA complete a bearish crossover below the 200 DMA, fresh downside pressure could emerge.
Macro drivers

The price direction in LME nickel is determined by negative risk sentiment. The metal has not been able to diverge from its peers, which are struggling to find short-term support. Still, it has kept most of the gains made so far this years and longer-term investors remain keen at this level, given that it is considerably cheap when pitted against its 2007 high of $51,800 per tonne.

According to the latest findings of the Philippine Mining Industry Coordinating Council (MICC), 13 out of the 26 local mining companies are "not acceptable," up from the four mines that were initially identified as failing to meet MICC standards.

The head of the Department of Environment and Natural Resources (DENR), Roy Cimatu, added that new administrative guidelines from DENR will be implemented based on the findings but he did not disclose the fate of the affected 13 mines.Continued uncertainty over nickel supply line from the Philippine could cause a steady decline of nickel ore availability into China.

But Indonesia has become the top nickel producer - years of Chinese investment have enabled the country to replace the supply lost from the Philippines. Still, the market balance remains in deficit this year. According to International Nickel Study Group (INSG), the market deficit of 69,600 tonnes in January-May is likely to grow. The structural deficit of 2016 of 49,200 tonnes and of 2017 at 113,700 tonnes should continue to support nickel prices.

Also, persistent outflows from exchange inventories should remain a bullish feature, limiting any downside pressure on prices. LME nickel stocks fell a further 1,014 tonnes this morning to a fresh 2018 low at 246,534 tonnes. What's more, another 750 tonnes were assigned for removal, another indication of healthy demand. Similarly,
SHFE nickel stocks continue to fall - they now stand at 18,104 tonnes after after the removal of 740 tonnes in the week to to August 17.

Even though it remains a medium-to-long term play, the bullish outlook from the electric vehicles (EVs) sector still underpins the LME nickel price. The International Energy Agency (IEA) estimated that there are now 3.1 million electric vehicles worldwide thanks to positive support from government incentives; these numbers are set to grow to 125 million EVs by 2030. 

Conclusion

Even though the nickel market has bullish dynamics, the current price weakness reflects growing uncertainty over the health of the Chinese economy and threat of a full-blown trade war. Given the series of lower highs and lows on the daily chart, we suspect there may be more downside in the short term but we also expect dips to prove attractive if the macroeconomic backdrop starts to improve.

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

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