Lithium ETF: A Near- to Mid-Term Technical Play

| About: Global X (LIT)

By Jason Raznick

In many ways, it's the perfect chicken/egg scenario: Fundamentals and technicals. It can be argued six ways to Sunday which one begets the other, but there are examples where these two schools of analysis can move in different directions.

A prime example of that may just be the Global X Lithium ETF (NYSEARCA:LIT). Still less than a year old, LIT has done well for itself, accumulating almost $188 million in assets under management. LIT's timing was impeccable as the ETF made its debut in the middle of bull market when investors were clamoring for some kind of alternative energy play that didn't involve solar or wind.

Count that among the fundamental factors that set LIT ablaze and have kept the ETF from suffering any big drops in its short lifespan. Now, let's look at the technicals. Recent drops below $22 represented quasi-dips to buy LIT and the ETF has now broken resistance at $23, which could induce some fresh buying.

But hold on. Back to the fundamentals. In January, lithium research consultants, TRU Group called the 2020 lithium supply/demand outlook "shocking." Shocking meaning huge overcapacity could pressure lithium producers. Put another way, all the fervor about electric cars may be a bit overstated by investors and those same investors could be headed for some heartache as lithium supply outstrips demand over the next decade.

This about sums up the lithium supply/demand quagmire: TRU CEO Edward R. Anderson estimates lithium demand will be 40,000 tons annually in the next decade while pipeline projects and expansions could increase capacity by an additional 40,000 tons per year -- "double what the industry needs," according to Mineweb.

For now, view LIT as near- to medium-term technical play. It could take a while for the fundamental case to catch up here and in the meantime, the ETF could have another $2-$4 of upside left.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.