Is Copper Poised for a Meltdown?
Fundamentals
Copper prices have been pressured over the past week on weaker equity prices and negative economic data. The poor showing in US retail sales was particularly bearish for Copper prices, as it could signal that economic activity could worsen before a recovery is seen. Despite upbeat housing and labor data, other areas of the economy -- such as manufacturing, banking and retailing -- have not yet shown a clear indication that a bottom has been reached. The overall Eurozone economy shrank at a rate of 2.5 percent in the first quarter of this year. German GDP fell by 3.8 percent for the first quarter, which is of particular concern to Copper traders, as the nation is the zone's largest economy and relies more heavily on manufacturing than other EU members. LME stocks of the metal continue to plummet, which can be seen as bullish for prices in and of itself. The concern among traders, however, is that China may be oversupplied at the moment, after importing heavily over the past few months, which could result in significantly scaled-back buying through the summer. US Copper imports rose in March due to a rebounding housing market, which can be seen as supportive of prices. As we move into the summer months, construction activity could hasten, requiring further imports of the base metal. The area of concern in regard to real estate is the commercial market, which has just begun to show cracks in recent months. If the commercial real estate market begins to tumble, it would not only hurt demand for Copper directly, but could also put the pressure back on banks and other financial institutions that have not yet recovered from the meltdown in housing. This could result in banks reverting to the tight lending standards seen last year, stymieing the recovery in housing and the overall economy.
Trading Ideas
Traders currently long the market, whether in a futures contract or bullish options strategy, may wish to consider exiting their positions on a solid close below the 1.90 level, as it could signal a reversal. More aggressive traders may possibly look to enter a short position in the July Copper futures contract on a close below 1.90. The downside objective of the short position could be 1.65, and it would probably be prudent to place a protective stop near the 2.05 mark. Copper futures are extremely volatile, so a futures position should only be taken-on if traders have sufficient capital to cover the relatively high margin requirements and absorb losses if the trade goes awry. Risk averse traders may perhaps be better suited entering a bearish options strategy instead.
Technicals
The July Copper chart has turned negative over the past week, as prices have pulled back sharply from relative highs. Failure to advance beyond mid-April highs sets up a possible double-top formation on the daily chart. The pattern would be validated on a close below 1.9165 and could send prices tumbling into the mid to low 1.60's. It is interesting to note that the RSI indicator has remained relatively flat during the recent slide, suggesting traders may not want to jump-the-gun and get on the short side of the market without validation of a double-top, as it could be a bear trap. Prices are quickly approaching the 50-day moving average. A close below the average could be seen as negative over the mid-term.
Rob Kurzatkowski, Senior Commodity Analyst
