MCX-zinc (₹144): BUY

The zinc futures contract traded on the Multi Commodity Exchange (MCX) has rallied strongly over the last three months.

The contract has risen over 17 per cent from ₹122.4 a kg in May to ₹144. Increase in demand coupled with a sharp fall in inventories is supporting the price rise.

According to the data from the International Lead and Zinc Study Group, , the market for zinc ran into a deficit for the first time in 2013 after many years.

Also, the deficit has widened to 2,34,000 tonnes in the first half of this year, which is much higher than the 94,000 tonnes deficit recorded for the entire 2013. Widening deficit is expected to limit the downside and could push the price further higher in the coming weeks.

Moving in tandem with the global zinc price, the MCX-zinc futures contract witnessed a sharp rally in the months of June and July. Subsequently, this rally took a pause and the contract has been on corrective consolidation since August.

The price action in the last two weeks of August suggests that the consolidation could be nearing its end. The contract appears to be gearing up for a fresh leg of up move.

This offers traders with a short-term perspective a good opportunity to initiate fresh long position in the contract.

Short-term view: The short-term outlook for the MCX-zinc futures contract is bullish.

The contract’s corrective fall from the August high of ₹146.95 found support at ₹137.6 – the 38.2 per cent Fibonacci retracement level.

An upward reversal from this support level has thereby kept the uptrend intact. The 21-day moving average level at ₹142 is the immediate support for the contract. Key short-term support is at ₹137.6. There is no danger for the short-term bullish outlook as long as the contract trades above this level. Resistance is at ₹147. A strong break above this level can take the contract higher to ₹155. Traders with a short-term horizon can initiate fresh long position at current levels. Stop-loss can be kept at ₹136 for the target of ₹154.

The short-term outlook will turn negative if the contract falls below ₹137.6 decisively. The ensuing target on such a fall will be ₹130.

Medium-term view: The medium-term outlook is also bullish for the contract. It has been trading in a bull channel for more than a year. Key medium-term support is at ₹130 which is also the channel support level.

While the contract trades above this level, a rally to ₹163 is possible over the medium-term. Traders with a medium-term perspective can consider holding their long positions with a wide stop-loss at ₹129 for the target of ₹162.

Intermediate declines to ₹130, if happens can be considered for accumulating long positions.

The medium-term outlook will be mitigated if the contract records a strong close below ₹130. The next target will be ₹121.