Commodity outlook and trading ideas by Bhavik Patel - Sr. Technical Analyst (Commodities), Tradebulls:
Commodity Outlook: US Dollar index hits 2018 high, thanks to rising surge in US Treasury yields. At present, the long-term 10yrs US Treasury yield is at 3.10% and I expect the yield to surge at 3.25% in the intermediate period. The geopolitical uncertainty regarding US-North Korea summit has driven the safe haven dollar higher. The correlation between US Dollar and long-term US yields faded in late 2017, however now the correlation has returned. USDINR is not trading in perfect correlation wiz a wiz US Dollar but is trading on macro indicators. The election in Karnataka has a bearing on it but overall we are still bearish on currency. The level of 67.20 needs to be breached before we can say INR is out of the woods. Oil’s advance to the highest since 2014 is squeezing the carry-trade returns on the Indian rupee to a point where they are the worst in Asia. Even though our nominal yields are second highest in Asia, the weak rupee is making the trade unprofitable. Borrowing in Dollars is yielding negative 3 percent this year compared to 12 percent carry trade return last year.
Gold closed below 200 days moving the average and psychological level of $1300. The pressure on gold is on back of rising US Dollar and Treasury yield. However gold is not yet in the oversold territory so we don’t expect dead cat bounce yet. The support level comes around $1280 and we would be looking how much buyers will emerge around that area. Another negative factor for gold is that it has broken the rising channel line it was trading since 2018. Now if gold in MCX trades below 30800, we feel 30500 is where it will take support and consolidate so at present, we are not recommending to create any long position. Gold/Silver ratio again is in favorable of silver outperforming gold and since past last week, this is what we have seen where silver is outperforming thanks to the rally in base metals.
Crude oil has been like the energizer bunny in 2018; it just keeps on going. We are seeing backwardation contract in WTI and that will benefit investors who are long in a commodity. The monthly roll process will generate positive returns for them. Both WTI and Brent one-year spreads from the active month are both trading at around $6 per barrel backwardation. OPEC, the oil cartel, is due to meet on June 22. If Russia and Saudia Arabia cooperate we may see prices remain at elevated levels. Iran's oil exports will likely be impacted in the coming months as international buyers turn to other suppliers for barrels. US Shale has a capacity constraint. That is why the crude market is ignoring rising rig data from the US. In MCX, we expect any correction only below 4700. We can see a formation of rising wedge on daily chart so reversal may happen if Crude happens to close below 4700. On the upside, expect resistance near 4900-4950. Buy on dips strategy should be used unless 4700 holds.
Target: Rs 162
Stop loss: Rs 155
Aluminum has successfully defended the retracement level of 23.6% taken from high of 178.85 and low of 145.50. It is currently trading above retracement level of 38.2% and next resistance comes at 50% retracement at 162.20. The price action dictates positive trend owing to the higher top and higher bottom formation. It is trading above 13, 20 and 50, 200-day moving average so all trends (short, intermediate and long) are positive. The oscillator RSI_14 is above 58 with no divergence so we recommend taking a long position with a target of 162 and stop loss of 155.
Buy Natural Gas
Target: Rs 197
Stop loss: Rs 188
Natural Gas is trading above 200 DMA after February in MCX. The range from Feb to May was 160 to 180 and now range breakout has been witnessed. The recent correction in Natural gas tested the upper end of the range and has successfully defended it so we now expect Natural Gas to trade in a new range of 180-200. The oscillators are trading above 50 indicating bullish trend and the prices are trading comfortably above all its important moving average. So we recommend creating a long position with a target of 197 and stop loss of 188.
Disclaimer: The analyst may have positions in any or all the commodities mentioned above.