Technical Analysis

ChartWatch: Pilbara Minerals probes key resistance as lithium futures eye fourth straight gain

Mon 26 Feb 24, 2:43pm (AEST)
magnifying class on chart resistance
Source: Shutterstock

Key Points

  • Lithium carbonate prices are edging higher in China, on track for their 4th day of gains
  • Pilbara Minerals is the most shorted stock on the ASX
  • Pilbara Minerals’ chart is showing signs of building excess demand, at what point could a short squeeze eventuate?

Lithium carbonate futures on the GFEX exchange in China are eying their fourth-straight day of gains. At RMB 103,350 per tonne, they’re up 11.4% from Wednesday’s low of RMB 92,700 per tonne. This sounds like a decent four-day gain, but looking at the chart below, context is all-important! Lithium carbonate futures remain 52% below the RMB 218,000 per tonne price at which the July contract commenced trading on 21 July, when GFEX first launched this futures product.

Lithium Carbonate Futures July-24 GFEX
Lithium carbonate spot price

Declines in the lithium carbonate spot market are even worse, down 83% since the 2022 peak, and are yet to emulate the tentative gains seen in the futures. This is not entirely surprising, though, given commodity futures prices tend to lead spot pricing – but it’s worthwhile providing a bigger picture view in any discussion of charts.

lithium carbonate spot
Lithium carbonate spot prices are yet to respond to the rally in futures

Is this the fabled re-stocking rally?

Lithium bulls have been waiting eagerly for any price response post-Chinese New Year holidays, which could indicate the much-anticipated post-holiday restocking cycle has begun. The big brokers are sceptical. In research reports released within the last two weeks, Citi noted “Inventories at the smelters are elevated”, and Morgan Stanley said, “We don't see a floor in lithium yet”.

So far, from a technical perspective, the current four-day rally is promising in terms of candles and progress, but it remains well short of closing above a few key technical resistance levels. Note In particular, historical resistance points/peaks at RMB 106,000 per tonne and RMB 110,300 per tonne. Each is likely to be crucial in terms of providing potential future excess supply.

Trend followers, like me, would exercise substantial caution until the lithium carbonate futures price closes above both key levels. I believe the make-or-break level is RMB 113,800. Only a close above this level would spur me to declare a new long-term uptrend has begun.

The nuclear scenario is if lithium carbonate futures close below RMB 85,400, and I suspect lithium bulls would prefer it if I just left it at that…

Spodumene also blips higher

Lithium carbonate is considered the lowest common denominator in lithium minerals pricing, and many other key lithium minerals like lithium hydroxide and spodumene concentrate are often compared in terms of lithium carbonate equivalent (LCE). But it’s worth keeping an eye on the spodumene price, given key ASX-listed lithium producers such as Mineral Resources (ASX: MIN), IGO (ASX: IGO), Pilbara Minerals (ASX: PLS), Liontown Resources (ASX: LTR), and Core Lithium (ASX: CXO) each mine spodumene.

spodumene concentrate
The spodumene price index is still pointing down

Spodumene spot prices, as measured by the SMM Spodumene Concentrate Index, are yet to experience lithium carbonate’s rally. Short and long-term trends here are well-established to the downside, and given the consistency of these trends, I suggest an uptick here is required before ASX lithium bulls get too excited.

But for those of you who are ASX lithium bulls, I have a sliver of good news! I’ve recently started charting the price of S&P Global Platts’ Australia Lithium Spodumene Assessment, which is the free on-board (FOB) price specifically relating to Australian producers of spodumene with a minimum 6% lithium oxide content. Newsflash…A blip! +US$20/tonne on Friday!

spodumene concentrate 6 percent
Finally, a blip up on the all-important Platts spodumene price

Pilbara Minerals shorts feeling some discomfort

And this brings us to the topic of our headline today: Pilbara Minerals. Undoubtedly, the rally it and other major lithium producers are enjoying today is due to developments in the lithium carbonate futures.

For those who don’t read our weekly short sell update, well, first of all, you should! But secondly, you should note that Pilbara Minerals is the most shorted stock by percentage on the ASX. Shorts sell first, intending to buy back later at a lower price. The difference between their sell price and their eventual buy price determines their profit.

Typically, investors don’t like to take losses, and shorts will realise a loss when the stock price rises above their initial entry (sell) price. In short, shorts don’t like it when the price of the stock they’ve shorted rises!

So, if we see signs in the technicals that Pilbara’s price is potentially on the rise, it could have major ramifications for short sellers who may be inclined to cover (buy) back their shorts to minimise potential losses. A rush by short sellers to close their positions is referred to as a “short squeeze”, and depending on the situation, a stock’s price can appreciate very quickly if this scenario eventuates.

Pilbara Minerals chart PLS
The technicals suggest building demand for Pilbara Minerals shares, but is it enough to break resistance?

Back to the Pilbara Minerals chart. I covered it in Thursday’s Evening Wrap after I had the pleasure of interviewing the company’s CEO, Dale Henderson. I noted I did see some “signs of accumulation”, but it was “limited by the broader bearish price action”.

Today’s large white candle is an important step in Pilbara Minerals effectively dealing with that bearish price action – mainly the key static historical resistance points of $3.89 and $4.01. Also in the mix, is the dynamic resistance of the long-term downtrend ribbon.

If today’s candle can close at or very near the high of the session, and that’s a big if, I suggest the shorts should be very uncomfortable indeed. It would demonstrate steady and consistent excess demand through the session, and via the close on the high, that this excess demand likely remains in the system for tomorrow’s session

In short, the demand side is therefore clearly not fearful of chart resistance and the supply side is floundering for control.

Given Pilbara’s chart has turned lower from 3.89-4.01 before, and given the proximity of the dynamic resistance of the long-term trend ribbon, I suggest it's brazen to assume a breakout is a given. These levels should be respected until they’re broken (that is, closed above). However, if they are broken, I suggest Pilbara shorts will become untenable.

Written By

Carl Capolingua

Content Editor

Carl has over 30-years investing experience and has helped investors navigate several bull and bear markets over this time. He is a well respected markets commentator who specialises in how the global macro impacts Australian and US equities. Carl has a passion for technical analysis and has taught his unique brand of price-action trend following to thousands of Aussie investors.

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