Ouch! It's a smelter

COMMODITY WATCH

A bleak outlook for zinc.

At Or-phe-us we say, when markets top there is always another top and when they bottom there's always another bottom. What this means is that topping and bottoming action are equally complex.

And there is only one thing which makes a technician's life easier. The mass psychology and sentiment associated with the respective top or bottom.

For example, the recent volatility in base metal stocks like Hindustan Zinc, which fell 25 per cent in 35 calendar days must have pinched if not hurt even the most entrenched bull. Have you thought what another 25 per cent might do? And why did we fall in the first place?

If these are not the questions that bother you, then you are more a part of the psychology wave (perceived sanity wave) than the rationality wave. And every volatile dip might just be a reason for you to blame the notorious hedge funds, find a global reason, some local reason, or maybe the Zinifex-Umicore merger news.

The combine together become the largest zinc producer in the world, and a top analyst again went on quote saying, "The zinc market is very hot right now and it's a good time to sell zinc smelters." We at Or-phe-us agree, the sector is headed for more heat ahead, especially if we hit our next target of another 25 per cent dip.

We had a target of about Rs 1000 for Hindustan Zinc on Nov 1 (the author does not have any position in the stock), and anticipated a turn subsequently. And what we witnessed the last few trading sessions is just one leg. If we see things right, there are more heartburns ahead. Rs 660 looked ridiculous then, but with a low of Rs 770 on Dec 13, at least we sound a bit rational now.

And above all, the two smelters that merged Zinifex and Umicore are technically diverging. Umicore has not made a new high while Zinifex has straddled 26 per cent higher above previous high.

Divergence as a concept is not positive if it happens at a top. Let's see, if this is one of the 33 per cent mergers that ever succeeded in the history of mergers since 1985.

And finally, the chart on the right is MCX Zinc ruling at Rs 197.85. This is the only hope for floating a bit longer on zinc. The coiling pattern marked with lines is called a triangle.

This pattern appears in the penultimate leg, which means even after this final up leg, the hurting should resume. And below Rs 192, we are in clear negative zone for our favourite base metal.

Clich here for the complete report.

Contributed by or-phe-us.com, a global alternative research company.