Zinc futures: Go short when it slips below ₹262

The zinc futures on the Multi Commodity Exchange (MCX) have largely been trading within the key levels of ₹262 and ₹292 for little over a month. The October contract is currently hovering around ₹270. The next swing in price will remain uncertain until it breaches either of ₹262 or ₹292.

Short build-up

Although the contract has remained range bound, it dropped by 13 per cent between August 31 and October 14 i.e., price declined from ₹309.9 to ₹269.7.

During this period, the outstanding cumulative Open Interest (OI) of zinc futures on the MCX more than doubled as it increased from 1,303 contracts to 2,860 contracts. A price decrease along with an increase in OI means shorts are being built-up. Therefore, we are likely to witness a price drop going forward.

However, from the perspective of trading, one should be cautious about initiating short positions now because the contract has a strong support at ₹262. In the last one year, the zinc futures have rebounded twice by taking this level as a support. So, fresh short build-ups notwithstanding, a good amount of the risk can be eliminated by waiting for the support of ₹262 to be breached before going short. A break below ₹262 can drag the contract to ₹245, its nearest support. Subsequent one is at ₹225.

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Trading strategy

Short MCX zinc futures with stop-loss at ₹275 when it slips below the support at ₹262. When the contract touches ₹245, liquidate half of the shorts and revise the stop-loss to ₹260. Exit the remaining at ₹230.

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