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

Resistances:
R1 $2,052 100 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 $1,924 50 DMa
S2 $1,844 April 2020 low
S3

$1,763 March 2020 low

Stochastics:
Bearish

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       
  • Fresh buying interest on Thursday May 28 has nullified some of the downside pressure in LME zinc (see chart).
  • This sets the backdrop for follow-through buying pressure to emerge, potentially allowing a base to form just above the May 4 low at $1,893 per tonne.
  • With the daily RSI and stochastic lines considerably lower and no longer overbought, there is now scope for a turnaround if more buying interest emerges.
  • The fresh buying in early Asian trading on Friday May 29 bodes well for consolidation higher in the short term.
  • If the price can trade back above the upward channel, it stands a chance of continuing higher and targeting the declining 100 DMA again.
Macro drivers

After the Chinese government's decision to enact the controversial national security law on Hong Kong, United States President Donald Trump, said late on Thursday that he will host a news conference today, fueling fresh concerns about what are already frosty relations between the two superpowers. It is perhaps unsurprising that the London Metal Exchange base metals prices have been lackluster, trading at relatively lower volumes than their weekly averages on Friday May 29, with most market participants choosing to stay on the sidelines.

Still, some base metals - aluminium and tin, for example, were able to stay resilient this week. Metals consumption should improve, picking up from a very low level. But countering that is a hasty supply recovery, with miners seemingly unconcerned by whether demand can keep pace with revived production. Zinc is the best example - the Antamina restart in Peru from Wednesday following its shutdown due to the Covid-19 pandemic has curbed buying interest.

But much improved speculative funds positioning has limited the downside pressure. LME zinc's net short fund position has contracted to 4,646 lots in the week to May 22. But might LME fund managers have turned bullish too hastily? The recent price weakness is likely to test buying conviction.

Other shot-term supportive dynamics stem from the continued decline in SHFE zinc stocks , which have fallen to 107,445 tonnes as of May 29, down by 11.1% from the previous month. LME zinc stocks have declined to 101,350 tonnes after outflow of 1,900 tonnes and freshly cancellations of 750 tonnes this morning.

The International Lead & Zinc Study Group pegged the refined zinc market in a 239,000-tonne surplus across the first quarter of 2020. We expect this surplus to widen to more than 400,000 tonnes in the full year as a result of the significant impact to downstream demand.

Conclusion
If LME zinc can close positively above its May low, it could still secure another higher monthly close (monthly chart not included). The rebound momentum has clearly slowed since mid-May, though, and the prices has retraced lower to retest technical support. Is the bear-flag formation still in play or is the price ready to turn around higher from here? In light of a deteriorating macroeconomic backdrop, we suspect more sideways trading with a downside bias to emerge in the short term. 


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