ZINC TODAY – Bulls make headway, price hits 5-year high

Short Term:
Medium Term:
Long Term:
Resistances:
R1 2117.50 July 2015 high
R2 2404.50 2015 high
R3 2485 High so far
Support:
S1 2324 20 DMA
S2 2313 50 DMA
S3 1809 May low
S4 1640.50 February low
S5 1444.50 Low so far
Stochastics:Slightly bearish
Legend:

DMA = Daily moving average

Fibo = Fibonacci retracement level

RSI = Relative strength index

H&S = Head-and-shoulder formation

UTL = Uptrend line

BB = Bollinger band

Analysis

  • Zinc has traded above its previous highs at $2,418 per tonne – it peaked at $2,485 per tonne, its highest since August 1, 2011.
  • The daily candlestick suggests the overall price action is bullish and that the buyers are in full control. If the metal can maintain its current momentum, the daily BBs could expand and to allow prices to edge higher.
  • Its daily RSI is edging higher and is fast approaching overbought territory but there remains room before it gets extremely overbought.
  • Meanwhile, the stochastic lines are still bullish but run the risk of a bearish crossover if selling interest picks up.


Macro drivers

Zinc market sentiment is poised to remain bullish. According to the ILZSG, global refined zinc will see a deficit of 340,000 tonnes in 2016. Risk-on sentiment was further boosted after the Bank of Japan (BOJ) announced that it will keep interest rates unchanged but pushed back the date for hitting its 2% inflation target to around 2018.

Also, the forecast-beating Chinese official manufacturing PMI has allowed the base metals to maintain positive momentum. Government stimulus programmes are working and have stabilised its economy.

On the speculative front, the next LME COT report will shed further light on whether the recent rebound in zinc prices has attracted fresh buying among the speculative funds. Net shorts have tentatively built up their positions, indicating that overall sentiment among the funds was relatively bullish. The reduction in the net longs has also made room for fresh buying, which could help zinc maintain its positive momentum.

The previous dominant warrant holder at 30-39% has disappeared since October 24 while the more sensitive ‘tom/cash’ has one entity holding at least 30-39% of the warrants. But shorts are concentrated in the November contract. Three entities collectively hold 25% of the open interest while longs only have two entities holding 10%. The contango in the c/3 has tightened to $4.50 from last week’s range of $5.25-$11.75. This suggests that shorts are under pressure to cover, which seems to tie in with the recent rise in zinc prices.

Other development

Glencore has closed its Black Star zinc open cut mine in Australia after mining out the existing reserves.

Conclusion

Macro conditions are conducive for zinc prices to rise but its technical conditions signal that it is vulnerable to overheating and runs the risk of a pullback.

The supply deficit as reported by the ILZSG could be a bullish catalyst but zinc has already rallied 72% from the January low – this may keep physical buyers on the sidelines. As well, higher prices should encourage secondary material to resurface and perhaps make it viable for previously closed mines to consider reopening.

On that note, we shall remain cautiously bullish towards zinc.

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