Very short term (1M):  Up
Short term (3M): Flat
Medium term (6M): Flat
Long term (12M): Flat
R1 $2,521 20 DMA 
R2 $2,958 2019 high
R3 $3,220 Jun 6 high
R4 $3,595.50 2018 high
R5 $3,780 Jul 2007 high
S1 $2,448 June 2019 low
S2 $2,424.50 Jan 10 low 
$2,283 Aug 15 low

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

  • With the upside capped by the declining 20 DMA, LME zinc has run into follow-through selling pressure. 
  • The rejection at the 20 DMA on June 11 is another blow in the series that has beset the metal since it reached a low on June 4 low at $2,448 per tonne (see chart). 
  • This indicates that sellers want to cap gains by consolidating in the first two weeks of June before resuming lower again.
  • The daily RSI and stochastic lines are starting to trend lower again, giving sellers an extra push in targeting the January 3 low at $2,356.50 per tonne.
Macro drivers
There are still two dominant warrant holders, each holding 40-49% of available zinc warrants. But the backwardation in cash/three-month spread has eased to $107.00 per tonne from this week’s peak at $151.00 per tonne. Perhaps the metal is not so tightly held in the short term; further easing in the nearby spread could indicate more metal is available for lending purposes. This could give short-sellers the opportunity to borrow and roll over their bearish exposure in the coming weeks. In fact, speculators were resilient sellers despite the extremely tight backwardation in the cash/three-month spread. Over the week to June 7, gross shorts added 1,847 lots, which was reinforced with 1,902 lots of stale-long liquidation. This was the eight consecutive weekly decline - zinc's net long fund position declined to 16,667 lots, in contrast to 2019 high at 29,170 lots on April 12. Based on the current downside momentum in the NLFP, the January 18 low at 8,601 lots looks a viable target, suggesting there is room for further selling.

Global refined zinc stocks are set to increase in the second half of 2019. There is growing evidence for this, especially in China, where zinc stocks in SHFE-approved warehouses have increased for the second consecutive week. Inflow of 1,353 tonnes in the week to June 6 raised inventories to 60,704 tonnes. The recent stock increase might reflect rising operating rates among domestic Chinese smelters.

Data is supportive of rising Chinese refined output in the coming months. The combination of growing availability of zinc concentrates and strong demand among Chinese zinc smelters kept spot zinc concentrate TCs cif Asia-Pacific stable at $260-290 per tonne late in May, unchanged from April. Chinese smelters and traders were actively locking away material since March; the increased margins for smelting zinc created buying pressure, with several Chinese zinc smelters restarting previously suspended operations. 

The rejection off the 20 DMA as well as the fact that all the gains made earlier this week have been e
rased indicate that sellers are still in charge of zinc in the short term.

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