Commodity outlook by Tradebulls Securities: Sell Zinc, buy crude

Commodity outlook and trading ideas by Bhavik Patel - Sr. Technical Analyst (Commodities), Tradebulls:

Indian currency fell past 70 per dollar this week on the back of broad-based sell-off in Asian currencies. INR 8.6% YTD has been steepest among Asian currencies. Interestingly, the fall of 7% has occurred since April so we had a rough 4 months in terms of rupee depreciation.  Dollar Index future is trading at 14 months high and had touched 97 level before retracing somewhat back to 96.5. Indian rupee is expected to depreciate further as India is also going through worsening economic data. India’s trade deficit widened to a more-than-five-year high of $18.02 billion in Jul. The weak currency was the primary reason behind RBI’s move of raising 25 basis points in June and Aug. Now RBI will face significant policy challenge whether to rein in Rupee weakness by raising interest rate or not. We continue to remain bearish in USDINR and expect Rupee to depreciate till 70.70 in Future. DXY has already given breakout in daily and weekly scale so we expect the ongoing momentum to continue.

Gold has broken the psychological support of $1300 for the first time since Mar 2017 on the back of strong US Dollar. Any fear of contagion from Turkey to Europe is not fuelling a fire to gold prices. It bounced from a level of $1160 but it is not yet out of the woods. Gold right now is trading very much as dollar proxy. Gold also had broken the support of Jan 2017 of $1180. The only silver lining for gold records net short position in COMEX. Speculators are most negative since Apr 1993. However, we may not see short covering unless gold breaks $1220-$1230. So gold is fundamentally bearish and sentimentally bullish. Fundamentally bearish on US interest rates, strong US dollar, credit spreads etc. Technically gold now is in oversold territory and we are expecting a minor pullback. Minor we are saying because DXY has given a breakout on a daily and weekly scale so any strength in DXY will be a major hurdle for gold. Gold in MCX has next support at Rs.29100 and any breakout on the upside can only come above Rs.30000.

Crude oil is witnessing a roller coaster ride. On the start of the week, it touched $71 and then again bounced back to $73.20. Now it is trading at $71.12. Crude oil is chasing headlines wherein its monthly report; OPEC lowered its estimate for global oil demand growth for 2019 by 20,000 barrels per day (bpd) to 1.4 million bpd. This prompted the selling however crude recovered after Saudi Arabia's output fell 200,000 b/d in July to 10.29 million b/d after agreeing in June to raise output. Now once again on strong Dollar, it has fallen back to $71. It becomes difficult for traders to trade in such a volatile environment. The spread between last reported US crude oil stock and 5 years average has further deteriorated and is now short of 20.5k barrels providing strong tailwinds to crude oil prices. WTI futures backwardation persists and the flattening of the curve is bringing marginal headwinds to crude futures. So crude is expected to trade in a range of $71-$74 as it has both headwinds and tailwinds.

Buy Crude 

Target: 4,720 

Stop loss: 4,500

Crude in COMEX has taken support at $71 and in MCX it has tested the support of 4550. Since mid of July, we have seen 3 instances where crude has bounced from the levels of 4550. So it is proving to be strong support.  RSI_14 also has witnessed strong support near 41 and at present, it is trading at 43 so looking at past instances, we are expecting a bounce back from current levels. We recommend long positions with a target of 4720 and stop loss of 4500 closing basis.

Sell Zinc

Target: 162 

Stop loss: 172

Zinc had broken its recent swing low of 170.70 made on 16th July. From July till mid- August, it was trading in a range and consolidating. The foundation for the base was nullified after zinc broke its trading range on the downside. Now since it is in oversold territory, it would not be prudent to take a position from current juncture but sell on a rise near 168. Risk-reward ratio justifies taking position near 168. We expect downside to continue till 162 and recommend short position near 168 with a stop loss of 172.

Disclaimer: The analyst may have positions in any or all the stocks mentioned above.