LEAD TODAY: Forming potential double bottom support

Short Term:
Medium Term:
Long Term:
Resistances:
R1 1814.50 Apr 2016 high
R2 1865 Feb 2016 high
R3 1895 Mar 2016 high
R4 1966 Jun 2015 high
R5 2118.50 Oct 2016 high
R6 2162 2015 high
R7 2260 50 DMA
R8 2283 20 DMA
R9 2400 Jan 2017 high
R10 2458.50 Feb 2017 high
R11 2576.50 Current high
Support:
S1 2222 100 DMA
S2 1814.50 Apr high
S3 1679 Feb low
S4 1588 Jan low
S5 1551 2015 low
Stochastics:
Legend:

UTL – uptrend line

Fibo – Fibonacci retracement level

RSI – relative strength index

DMA – daily moving average

H&S – head-and-shoulder pattern

Analysis

  • So far, lead is undergoing a pullback after the strong rebound from the December 2016 low at $1,959.00 per tonne to the February 13 high at $2,458.50.
  • It just broke below the 100 DMA but the 50% Fibo of the December 2016 low–February 2017 high at $2,208 per tonne is acting as nearby support for now.
  • Should lead prices close higher today, it has the potential to form a rather bullish double bottom formation.
  • Nearby overhead resistance resides at the 50 and 20 DMAs which are about to complete a cross-over. A break above is likely to relieve some of the selling pressure but should further downside materialise, lead is likely to test the next technical support at the 61.8% Fibo at $2,149.81 per tonne which will coincide with May 2016 low UTL(see chart above).
  • The daily RSI remains weak and is treading lower at 41.95. Meanwhile, the stochastic fast line has completed a bearish cross-over which indicates decent selling interest.
  • Against such a technical backdrop, we remain cautiously bearish towards lead prices.

Macro drivers

Risk-off sentiment continues to plague the base metals complex. Prices are off to a weak start due to follow-up selling activity in the early Asian trading session. Lead stands out because it suffered the biggest decline, down 1.6% as of the time of writing and trading as low as $2,203.00 per tonne.

Lead’s net long fund position (NLFP) declined for the third consecutive week. It now stands at 19,132 lots as of March 3 after fresh selling of 1,019 lots which was offset by 406 lots of buying. Given the already low level of gross short positions, money managers may have found value in actively increasing their bearish exposure and this should keep sellers in control. There was buying but the fresh addition reflects the lack of conviction among money managers and it is likely to put lead prices under selling pressure again, we feel.

Tightness has returned to nearby spreads as the previous contango in the cash/three-month has reverted to backwardation of $1.25. The presence of a dominant warrant holder, holding 30-39% of the available warrants, suggests that the metal is held in tight hands. As well, the March contract remains dominated by shorts that collectively hold 50% of open interest. With only four entities and collectively holding just 40%, there are insufficient longs in the market to cover shorts that wish to roll-over their positions.

Premiums were stable but heavily bias to the downside due to the strong LME price which discouraged spot demand. High levels of domestic inventory and the recent ramification of currency demonetisation in India have resulted in weak demand for the metals despite being the busiest month for restocking. Elsewhere in Southeast Asia, things are relatively quiet too with average premiums at $50-90 per tonne for 99.97% and $90-110 for 99.99% lead material.

Other development

Tightness in the concentrate market is rather apparent as Chinese trade data alone showed a 25% decline in concentrate imports in 2016. Shuttered key zinc mines are taking a toll on the overall global output of lead concentrate. TCs remain on low levels and some smelters are processing more scrap as a substitute to concentrates which are becoming scarcer. Higher LME prices have made secondary metals production viable and this is likely to increase supply into the market. But in the event that there are little to no concentrates, the already low TCs are likely to force smelters to reduce production of refined metals and that could be quite constructive for lead prices.

Conclusion

Should lead break below psychological support at $2,200 per tonne, the price action is likely to encourage additional selling momentum which could push the metal lower to test the next support level that sits at the 61.8% Fibo or the May 2016 low UTL (see chart above). At this technical juncture, dip-buyers will need to prove that they have the ability to absorb late selling, consolidate and build support to test higher again.  

The short-term fundamental conditions are not supportive either. Total LME stocks saw a sizeable inflow of 675 tonnes in Antwerp and the recent backwardation is likely to encourage more metals into LME-bonded warehouses.

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