Will shorting nickel work?

Shorting nickel when BusinessWeek publishes a nickel deficit story is being contrarian. But, there has to be something with performance cycles which spots extreme sentiment and potential reversal. The tool based on time fractals suggests that nickel should underperform gold, and shorting nickel, even if not on an absolute basis, should work against AIGP (73 per cent gold).

Nickel did not make it to the cover of the magazine. A magazine cover can give a further negative confirmation on a popular asset. However, new price highs, backed by loads of fundamentals, makes it necessary to review nickel’s performer status. What are the fundamental reasons? The deficit may happen the first time in four years, as the global economy recovers. Nickel, being an industrial metal, recovered with the economy. To assume it will keep pushing higher is like expecting the economic cycle to continue the upside. That may happen, but how do we find whether the cycle of nickel performance is topping or bottoming? First, a few questions. Where are the demand numbers going to be highest, at cycle tops or bottoms? Demand numbers crash at the bottom and skyrocket at the top. So, are we forecasting or extrapolating?

Nickel is used to increase the corrosion resistance of stainless steel. About two-thirds of global nickel production is used in stainless steel and because domestic stainless production has recovered to 80-90 per cent of normal levels, nickel should rise. This is extrapolation. Steel has recovered. It should continue to push higher and hence influence nickel positively. Simple causal explanations. This is the reason why a majority of fundamental reasons have China. China grows, demand grows, and nickel grows.

Nickel performance cycles
If only life would be so easy. Orpheus is negative on China (Waves.Global). We are expecting intermediate negativity ahead. The latest alpha metals illustrate performance cycles between gold and nickel, and industrial metals and nickel, to validate our underperformance case on nickel. Click here to view image

Nickel vs gold performance is cyclical. Nickel takes turns against gold in performance. Long nickel–short gold delivered 82 per cent (February 17, 2009 to August 4, 2009); short nickel-long gold delivered 50 per cent (August 6, 2009 to December 1, 2009); long nickel–short gold delivered 69 per cent (December 2, 2009 to April 15, 2010).

This was an average of 139 calendar days. Now, the cycles suggest it is time for short nickel-long gold. We also looked at the intermarket relationship between AIGI (industrial metals index) and nickel. The metal has reached an intermarket performance high against industrial metals. Last time nickel reached a high in outperformance against AIGI was on August 5, 2009. Nickel underperformed industrial metals by 31 per cent till January 2010.

Click here to download metals chart

The idea of performance cycles is simple. Time cycles work across time frames and relative performance is cyclical. A cycle turns down when it reaches a high, like it seems to have for nickel. This is why short nickel–long gold should be near.

(The author is a chartered market technician and CEO, Orpheus CAPITALS, a global alternative research firm)