Ever since the September futures contract of zinc in Multi Commodity Exchange (MCX) broke out of the resistance at ₹170 in early June, the contract has been rising. The rally resulted in the contract touching a high of ₹200 last Friday.
However, the contract could not breach ₹200 and moderated – it is now trading around ₹195. Nevertheless, the price remains above the 21-day moving average (DMA), which now coincides with the support of ₹192. Until it stays so, the decline cannot be counted as a bearish trend reversal.
Even though there are no outright signals of a trend reversal, there are noticeable indications of bulls losing traction. Unlike the contract, the daily relative strength index has not formed a fresh high – potentially forming a bearish divergence. The moving average convergence divergence indicator, which flattened before a couple of weeks, is now slightly pointing downwards.
With signs that are unfavourable for the bulls, if the contract breaks below the support of ₹192, it can possibly turn the outlook negative, at least in the short-term. Subsequent support is a bit deeper at ₹178 – 50-DMA. On the other hand, if the contract regains upward momentum and breaches the psychological level of ₹200, it can potentially rally to ₹214.
On the global front, the three-month rolling forward contract of zinc in London Metal Exchange (LME) has been moving up since early July. Currently, the contract is hovering around the crucial level of $2,500. Though the major trend is positive, a rally from here depends on whether the contract crosses over it or not.
Trading strategy:
Though the price action of the contract in the MCX is inclined to uptrend, it is facing a considerable resistance at ₹200. And in the short-term it can stay within ₹192 and ₹200. So, until either of these levels are breached, traders can stay on the side-lines. The direction of the break can be a good indicator of the next leg of trend.