ChartWatch: Did we just see the low in lithium minerals prices?

No news here, lithium minerals prices have been getting hammered in 2023! For example, as of yesterday’s daily average price of RMB 122,500, the Lithium Carbonate spot price is down 79.5% from its intraday high of RMB 600,000 set on 14 November 2022.

Lithium Carbonate average daily spot price. Source: SMM

In a recent article, I outlined UBS’s views on the lithium minerals market, particularly their logic for why Lithium Carbonate prices could bottom out around RMB 80,000. Well lithium bulls, I have some good news and some bad news.

Bad news first, UBS is looking pretty spot on with their predictions. Lithium Carbonate futures prices on the Guangzhou Futures Exchange (GFEX) touched RMB 85,650 on the benchmark January 2024 contract, and as low as RMB 82,700 on the March contract.

The good news is, according to UBS, this is where Chinese lepidolite producers will likely tap out in terms of supply into a market that is currently in surplus. UBS is predicting massive increases in lepidolite production, from 130 kt this year to 189 kt in 2024, and 282 kt in 2025.

Are there yet? Could be!

So, if potentially “we’re finally here” in terms of lithium carbonate pricing, what happens now? From a technical perspective, there are usually three potential scenarios after a massive plunge of the likes we’ve witnessed in the charts of lithium minerals.

1. Major, sustainable low

If you’re a lithium bull – this is definitely the one you want. Rapid and large rallies are typical of short covering and positional buying. Watch out for substantially above-average volumes here, this will indicate there’s a major shift in thinking among big investors, and substantially above-average daily price ranges. Finally, you should see white candles or long downward-pointing shadows and closes at or very near the high of the trading session. This last item speaks of unfulfilled excess demand.

2. Dead cat bounce

One of the oldest concepts in markets is the “dead cat bounce”. This occurs when a market plunges and only bounces a little, before slumping again and bumping along the bottom for a protracted period (I am sure a few dead cat bounces come to mind!).

This, and the next scenario, would likely spell further pain for lithium bulls. In a dead cat bounce you’ll get at best a modest rally on low-volume and mixed candles (i.e. black and white). I propose less than a 10% rally within a few trading sessions is at risk of turning out to be a dead cat bounce.

Dead cat bounces are typically caused by the entry of only speculative buy-the-dip money, and not motivated short covering or long-term positional buying. This speculative money is only looking for a quick turn, and it will likely look to jump out after any kind of bounce. Without the big money coming back in, the price is prone to falling back again.

3. Prevailing trend reasserts

The worst-case scenario would be no bounce at all. The price just stagnates at the lows with little volume and volatility. This is an excellent sign short sellers are comfortable with their positions, and not even the hot, speculative money is willing to bet on a bounce. The big money is very likely not buying in this scenario, on the contrary, they’re probably still selling.

C’mon Carl, pick one!

Which scenario are we in? Sorry readers, it’s too early to tell, but the information in this article should serve as a great guide to help you determine this for yourself. I did spot something in GFEX Lithium Carbonate futures yesterday that tells me we may be at the start of at least a Scenario 2, but hopefully for lithium bulls, potentially even a Scenario 1.

Lithium Carbonate average daily spot price. Source: SMM

Above is the chart of the July 2024 Lithium Carbonate futures contract. I noticed something very unusual in yesterday’s candle, perhaps you’ve already picked it up? For the first time in the contract’s history, it nearly eclipsed trading on the front month January contract. The volume was also substantially greater than anything it’s printed before.

The candle also interests me. The gap lower on the open is consistent with the prevailing downtrend and it speaks of continued selling by trend followers and short sellers. But! After probing only a little lower, the price turned around and rallied into the close. The volume tells me it is more than just speculative buy-the-dip buying coming in.

It’s a good candle, on good volume. But it’s just one candle! It’s a start, but we still need to see further confirmation the demand side has taken control of the price. Similarly, we want evidence that the supply-side’s mentality has switched to “Hmmm, let me just hold back here and see how much more I can get!”.

Technical signals that could confirm the low in the lithium carbonate chart:

• Over the next few trading sessions:

  • White candles or downward pointing shadows, preferably closing at or near the high.

  • Substantially greater than average volume on the next few candles.

  • Once the low is in, lower than average volume.

• Over the next week or weeks:

  • Higher peaks and higher troughs.

  • The price trading above the short-term trend ribbon (pink zone).

  • Short-term trend ribbon flipping to up / green.

Over to you!

Before you get too excited about the prospect of a major market low in lithium minerals. The trend in all lithium minerals charts is still well and truly down. We should not forget this or understate its importance! As it stands, the evidence suggests the market for lithium minerals remains in a state of excess supply, not excess demand.

So, let’s not jump to conclusions with calls the low is in! Rather, we shall simply acknowledge there now exists a first-step technical signal which is consistent with a potential major low.

In tomorrow’s ChartWatch, I’ll run my technical ruler over the charts of several ASX lithium stocks. If there’s a particular lithium company you’d like me to analyse, please follow this link to let me know!