Legend:MACD = Moving average convergence divergenceBB = Bollinger bandDMA = Daily moving averageFibo = Fibonacci retracement lineSL = Support lineHL = Horizontal lineedH&S = Head and shoulder pattern
| Technical CommentAnalysis
Nickel prices have rebounded sharply after the recent plunge to $7,550 – they have been as high as $9,480 but corrected sharply on Tuesday.
The did find support from the 20 DMA, although the steep UTL and the neckline of the inverse H&S formation were breached. Prices are back above the latter now.
The target from the H&S pattern is $9,795.
Nickel can be a volatile market. The early-February break lower seems to have been a false move; this break higher seemed strong but its robustness is now being tested.
With the stochastics have crossed lower, we would see this as consolidation for now.
On balance, having been so oversold in 2015 and ealry 2016, we will give nickel the benefit of the doubt and look at this pullback as consolidation, expecting it to move towards its H&S target before too long.
Other factorsThe Philippine Nickel Miners Association, which accounts for 60 percent of domestic nickel ore output, has agreed to reduce ore output this year by as much as 20 percent over 2015 volumes. This shows the supply response continues.LME stocks have become fairly flat although they have been falling again recently. Cancelled warrants account for 32 percent of LME stocks.The market is not looking tight yet; the c/3s spread has remained in contango and there are no large position holders for nearby metal although there are three large shorts for the March datem that collectively hold 35-57 percent of the open interest. Market open interest for the March date is 31,145 lots.Given good supply and a lack of tightness, it is perhaps surprising prices are rallying. Still, nickel is probably one of the markets that has become the most oversold, having the most capacity underwater.Last week’s LME COTR data showed the firmer prices of late had caused both short-covering (5,425 lots) and profit-taking by longs (341 lots). The gross long position is already heavily long so the market is vulnerable to more long liquidation and profit-taking now the rally has shown signs of faltering. The gross short position at 57,985 lots is just below average – the average since the start of 2015 has been 59,479 lots and has ranged between 37,108 lots and 72,248 lots.We would be wary of nickel because of how volatile it can be. The current fundamentals are not bullish in that there is a huge amount of stock around but countering that the forward fundamentals seem set to tighten because so much capacity is loss-making. We also feel that falling prices will have led to a destocked nickel/stainless steel supply chain so the impact of restocking is likely to be aggressive when the tide turns. The recent run-up in price suggests the tide may indeed be turning – the rise in iron ore prices also points to restocking.ConclusionPrices have recovered from the spike lower – the rally was strong but it is now consolidating. On the daily chart the rally looks to have gone a long way but on the longer term chart (see insert on chart) the rally seems to have only just started.We also feel the demand side could kick into gear now that prices are showing strength while the market swings from being destocked to restocking, which is a special trait of nickel and stainless steel.Even if this rally gets going, it may not last too long while LME stocks remain high and do not yet appear to be tightly held. But this could change.[/table][/table]
MBN Price at posting:
8.3¢ Sentiment: Buy Disclosure: Held
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