ZINC TODAY: Price correction under way; expect good underlying support

Short Term:
Medium Term:
Long Term:
Resistances:
R1 2834 20 DMA
R2 2895-99
R3 2980.5 Feb 13 peak
R4 2985 Nov 2016 peak
Support:
S1 2790 Neckline (broken at)
S2 2777 Recent support
S3 2669
S4 2626 UTL
S5 2516 Dec 2016 low
Stochastics:Bearish
Legend:

COTR – commitment of traders report
DTL – downtrend line
Fibo – Fibonacci retracement line
H&S – head-and-shoulders formation
MACD – moving average convergence/divergence
SL – support line

Analysis

  • This year’s rally in zinc prices petered out on February 13 at $2,980.50 per tonne, just $4.50 per tonne shy of the November 2016 high. Overhead supply therefore seems evident ahead of $3,000 per tonne.
  • Having been capped by selling, prices started to consolidate, but consolidation has been followed by further weakness.
  • The double top  seem to have become an influential pattern and a H&S has also been triggered at $2,790 per tonne. The count from this would be $225 per tonne, producing a target of $2,565 per tonne. 
  • The 20 DMA is now moving lower and the stochastics remain bearish. 
  • The overall trend has been bullish for more than a year. It looks set to continue after this correction, which may well be prompting stale long liquidation.
  • The UTL is at $2,626 per tonne; it will be interesting to see if prices find support ahead of this level or if they go on to reach the H&S target. We would not give up on our overall bullish outlook unless the December low at $2,516 per tonne is breached. 

Macro factors

The pick-up in weakness seems to have been driven by a combination dominant overhead supply ahead of $3,000 per tonne and more recently by dented sentiment after China reduced its growth target to 6.5%.

These may be prompting some stale long liquidation – we wait to see what today’s LME COTR data shows. We would not get too bearish while the fundamentals remain strong.

Cancelled warrants have risen, which may signal a pick-up in stock outflow. It also means there are now fewer than 200,000 tonnes of available metal in LME-listed warehouses. 

A price correction is constructive because lower prices should entice more buyers back into the market.

Conclusion

Zinc’s fundamentals are strong but LME data shows money managers are not that active so fresh buying pressure may have to come from consumer, who they have been in no hurry to chase prices higher – they may well buy into the dip, though. Overall, we remain friendly to the metal’s outlook and we expect dips to be well supported, especially while availability in LME warehouses is tightening.

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