BSE Metal Index testing key support

BSE Metal Index (closed at 15,121) constitutes 13 stocks that are associated with the iron and steel, aluminium, copper, mining and zinc industry. In this index, Tata Steel has the highest weight of 21.9 per cent and Jindal Steel follows with 15.6 per cent.

Hindalco Industries and Sterlite Industries share 14.8 per cent and 14.7 per cent weight in the index respectively.

Long-term

BSE Metal index had a spectacular bull run from its 2001 low of 863 until it peaked out at 20,494 in January 2008 triggered by the sub-prime crisis and the resulting global recession. Subsequently, metals such as aluminium, copper and zinc plummeted sharply. After touching a low of 3,806 in October 2008, BSE metal index bottomed out.

The Metal Index found support in the band between 4,000 and 4,500 and formed a strong base at 4,500 levels before it stated to trend higher.

However, encountering resistance around 18,500 and coupled with negative divergence in the monthly relative strength index, the BSE Metal Index changed its direction in April 2010. Since then, the index has been on a sideways consolidation phase in the broad range between 13,900 and 18,500.

The index failed to move above 18,000 levels couple of times, in October 2010 and January 2011 signalling lack of strength. In the long-term the index can decline and test the lower boundary of the sideways range at 13,900-14,000. Strong weekly close below 13,900 can pull the index down to 13,000 and then to 12,500. However, the long-term trend deciding level is much below at 11,300 only an emphatic dive below this level will mar the uptrend and accelerate sharp declines to 9,500, 8,000 and 7,000 levels. On the other hand, a strong rally beyond 18,500 levels will reinforce the bullish momentum and lift the BSE Metal Index higher to the 20,000-20,500 range in the long-term.

Medium-term

From its January peak of 18,129, the index has been on a medium-term downtrend. In early May, the index breached its 200- and 50-day moving averages and is hovering well below them.

Nevertheless, the index knocks a significant intermediate-term support around 15,000 and is currently testing it. Daily moving average convergence divergence indicator and relative strength index are featuring in the bearish zone.

An emphatic break through of this support can pull the metal index down to 14,500 and then to 14,000 in the medium-term. But a reversal from this support can lead to a corrective up move to 16,000 or 16,300 levels. Only a decisive move above 17,000 is required to mitigate the downtrend and take the index upward to 17,500 and 18,000 in the medium-term.