Very short term (1M):  Up
Short term (3M): Flat
Medium term (6M): Flat
Long term (12M): Flat
Resistances:
R1 $2,441 October high
R2 $2,504 July high
R3 $2,958 2019 high
R4 $3,595.50 2018 high
R5 $3,780 Jul 2007 high
Support:
S1 $2,380 100 DMA
S2 $2,332 20 DMA
S3
$2,190 2019 low
Stochastics:
Starting to look overbought
Legend:

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



Analysis
  • The last two daily candlesticks are starting to look very tight and limited - buyers and sellers of zinc are unsure the directional bias in the very short term.
  • Even though the technical configuration has managed to produce a series of higher highs and higher lows since the September 3 low at $2,190 per tonne (see chart), the upside momentum has started to slow on the approach to the upper channel of what appears to be a bear-flag formation.
  • We expect fresh selling pressure to emerge near the upper channel, capping any upward momentum.
  • In the short term, the daily RSI and stochastic lines have reached overbought territory, making zinc vulnerable to fresh selling pressure, we feel.
Macro drivers
Overnight news that the US House of Representatives has supported the bill on Hong Kong Human Rights and Democracy Act has angered China, complicating an already strained relationships between the two economic powerhouses. The bill is now under consideration by the US Senate; China has said that it will retaliate if the bill is passed. The threat the bill poses to the already fragile “phase one” trade deal may undermine risk sentiment and ultimately put downside pressure on base metals prices.

Still, there are price-supportive elements in zinc. Speculative funds bought 3,755 lots in the week to October 11, narrowing zinc's net short fund position (NSFP) to 346 lots. This also marked the end of two consecutive weeks of selling pressure but also considerable indecision among fund managers about direction remains. Still, the smaller NSFP dovetails with the increase in the price. A return to a net long fund position could unlock more gains.

But the metal also faces a challenging fundamental backdrop. Data from the International Lead & Zinc Study Group (ILZSG) shows that global refined zinc market was in a deficit of 106,000 tonnes in the first seven months of 2019, down from a 170,000-tonne deficit in the same period in 2018. And while stocks in LME-registered warehouses continue to fall, stocks at Shanghai Futures Exchange-listed sheds are growing. LME zinc stocks totaled 61,625 tonnes on October 15, down from 66,750 tonnes at the start of the month, but SHFE zinc stocks increased by 6,077 tonnes to total 70,172 tonnes on October 11.

Global zinc supply, especially from China, should remain strong until the end of the year despite smelter outages over June-August. Data from the country’s National Bureau of Statistics shows that zinc output rose by 18.9% year on year to 528,000 tonnes in August, suggesting that domestic smelters were able to maintain high utilization rates and were able to avoid the bottlenecks of the first half of 2019.

This also confirms our view that Chinese zinc smelters remain well supplied with zinc concentrates, taking full advantage of attractive treatment charges (TCs). A further fall in with spot cif Asia Pacific zinc concentrate premiums late last month reflects subdued buying interest.

Conclusion
LME zinc is on course for further gains in the very short term. But with upside momentum slowing, the likelihood of tests of technical support is growing.


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