Very short term (1M):  Flat
Short term (3M): Flat
Medium term (6M): Flat
Long term (12M): Flat

Resistances:
R1 $2,016 20 DMA
R2 $2,149.50 Feb 2020 high
R3 $2,459.50 2020 high
R4 $2,958 2019 high
R5 $3,780 Jul 2007 high

Support:
S1 $1,913 March 2020 low
S2 $1,900 Psychological
S3

$1,809 May 2016 low

Stochastics:
Oversold

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       
  • Selling pressure appears to have paused at the median channel of a broader downward flag formation (see chart).
  • But with no sign of immediate dip-buying and the London Metal Exchange three-month zinc price trading below the psychological price level of $2,000 per tonne, the complex remains vulnerable to short-term selling.
  • Still, we cannot rule out the possibility that the LME zinc price is trying to form a base here, potentially replicating the August 2019 low that enabled the metal to enjoy some respite to the upside (see chart).
  • Given its oversold weekly RSI and stochastic lines, such a rebound remains possible but buyers need to get over “sell-the-rally” mentality to get prices working higher.
  • The alternative scenario is for a solid break below the median channel and the price to start targeting the 2016 lows.
Macro drivers

Global market remain rattled by the spread of the novel coronavirus (2019-nCOV) across Europe and the United States. Panic-selling in major equity markets now paint a drastically different picture that of early January, when the market celebrated record highs following the signing of a trade deal between China and the US. While the virus originated in China, the country appears to be progressing steadily in its efforts to contain the virus and the draconian measures put in place have resulted in a slowing of infections across the country. But it does not appear as though countries in the West have learnt that these excessive but necessary measures are required to halt the outbreak.

That said, as the virus continues to spread rapidly outside China, governments across Europe are being forced to carry out more lockdowns and the resultant impact to aviation, leisure and other industries is being increasingly felt due to a reduced demand outlook and less capital to spend on big ticket items. It is also apparent that coordinated global monetary easing from central banks is not having the positive effect intended while the negative impact of the coronavirus is set to persist in the coming weeks. Still, efforts to pledge and provide liquidity in times like this is paramount to keep the economy going and perhaps to delay what seems like an inevitable global recession.

There is strong evidence that sentiment toward zinc remains fairly bearish. That being said, we also acknowledge that the metal is fairly oversold compared with its peers, making it vulnerable to a counter-trend reversal - the risk/reward ratio to the upside is far more favorable. LME fund managers continued to build their bearish exposure in zinc in the week to March 6 - shorts added 2,098 lots, which offset the buying of 253 lots by longs. This resulted in LME zinc’s net short fund position (NSFP) expanding to 17,730 lots - a new record high since the relaunch of the LME commitment of traders report (COTR) in accordance with MiFID II. But with the LME zinc price recovering, the overstretched NSFP is now at risk of short-covering.

We now expect reduced inflow of metal into LME and Shanghai Futures Exchange sheds in light of the supply disruptions in China. LME stocks totaled 74,000 tonnes on Tuesday, while canceled warrants were unchanged at 11,900 tonnes.

Total LME stocks level now stand relatively stable at 74,000 tonnes while cancelled warrant reported no change at 11,900 tonnes on Tuesday March 17. Although we anticipate less inflows into the LME and SHFE in light of the ongoing supply disruptions in China, it will be in the coming weeks when the impact is felt. Reports suggest some zinc refineries may also be forced to cut production as a result of cash flow pressures borne out of limited trading activity. Major smelters Hanzhong Zinc Industry, Zhuzhou Smelter and Zijin Mining-Inner Mongolia have already cut 40-50% of their production.

Conclusion
Any hopes of the LME zinc price trading above $2,000 per tonne again will require a great deal of buying, improved sentiment among speculators and possibly production cuts as well. LME zinc’s technical configuration now sits between two scenarios, a short-term rebound or a continuous move lower toward the 2016 lows. Sellers still have the edge for now; buyers need to show up soon or risk a lower low.


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