ZINC TODAY – Capped by overhead selling 6th December, 2016 11:00...

ZINC TODAY – Capped by overhead selling

6th December, 2016 11:00 AM by Will Adams

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0	Analysis Zinc’s rally went parabolic in the second half of November, with prices spiking up to $2,985 per tonne, basis three months. The long-term chart shows prices have cleared the highs going back to 2009. Prices had become extremely overstretched so a correction is not surprising. Prices are now $96 per tonne above the 20 DMA; at the recent peak they were $331 per tonne above it. The stochastics have crossed lower. The market is looking slightly toppy but dips have tended to be well supported and short-lived. Macro factorsWhile zinc prices had a lot of upward momentum, they looked overbought. We expected producer selling to become more of a dominant force at these price levels. This seems to have unfolded over the past two weeks. C-3s is holding in a contango either side $18 per tonne. The weaker spread suggests profit-taking by longs and corresponding lending. The main change in the spreads is in the forwards, which until November 28 were diving into deeper backwardation, which is a sure sign of forward selling: 3-15 month was valued at $55.75 per tonne backwardation on November 28, out from $22b per tonne on Monday November 21. Over the same period, the 3-27 month backwardation was at $294.50 per tonne compared with $84.50b per tonne and the 3m-5y spread was at $478b per tonne compared with $208.50b per tonne. The forwards are easing into price weakness but tightening up into rallies, which suggests there is still scale-up selling around.The market does not feel tight. LME stocks are at best merely drifting lower.Option declaration is on December 7. There are 1,160 lots of calls between $2,700 and $2,900 per tonne. On the downside there are 335 puts between $2,675 and $2,600 per tonne.ConclusionZinc’s rally has been super-charged and there have been only limited pullbacks along the way – the latest rally through key potential resistance levels shows the uptrend is intact. Given sharp gains, we should be braced for sharp pullbacks. Key will be how well the market handles the pullbacks – whether they turn into spikes or extend lower. With the forward spreads easing into the price pullbacks, the sellers do not seem prepared to chase prices lower. So sell orders may cap the upside but not push prices lower; but if the upside is capped, money manager longs may become stale and decide to liquidate.We remain bullish for the metal’s fundamentals but less so for the price at these levels. To get more bullish, we would want to see a more concerted drawdown in exchange stocks.
1	All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations