Red Metal Set for Another Run?
Fundamentals
Copper futures are up for the third consecutive session on an improved economic outlook and much better than expected consumer confidence numbers. The consumer confidence index jumped by over 14 points yesterday, a sign that a revival in consumer spending may be around the corner. A survey by the National Association of Business Economists showed almost three quarters of economists believe that the US recession will be over by the third quarter of the year. High unemployment, though, may result in a relatively modest recovery. Also, while the economists predicted a recovery in consumer spending, the rate at which spending will increase is expected to be lower than prior forecasts. China is in the midst of what appears to be a V shaped recovery, so any increase in consumer spending in the US would certainly aid economic growth there. The LME reported a drawdown in inventories for the 14th consecutive day. Traders have been cautiously optimistic that the drawdowns of LME inventories are due to an economic upswing in China and not stockpiling. Despite the bullish shift in sentiment, downside risks remain for the metal. The US housing market may very well have hit a bottom recently, but new housing starts could remain slow for the foreseeable future due to high unemployment. Also, we are about to enter the summer months, which have historically been a slow time for Copper demand in China. For Copper to remain bullish, economic data must remain upbeat in China and the US. A meltdown in commercial real estate in the US could also hurt the metal. If commercial real estate is able to avert a disaster, it could provide price support for the red metal.
Trading Ideas
The fundamental and technical bias seems to favor the bull camp at this point, but traders may want to wait on the sidelines until a bullish breakout from the wedge formation is confirmed. Traders can reference the disastrous situation they would have been in had they jumped on the possible double top without waiting for confirmation. Aggressive traders may wish to enter a futures position on a breakout from the wedge formation, which would be triggered on a solid close above 2.16, with a profit target of 2.38. The stop can be initially placed at 2.10 and adjusted along the extension of the lower barrier of the wedge.
Technicals
The July Copper chart has, thus far, avoided the dreaded double top formation and the pattern has evolved into what appears to be a wedge. This suggests a bullish bias, as a wedge formation is typically viewed as a continuation pattern. The 50 day moving average has acted as support, just below the lower boundary of the wedge. A close below the 50-day average could be seen as a double negative for prices, as it would also make the wedge pattern invalid as a continuation pattern. Momentum has shown strong bullish divergence from the RSI, but not prices. This can be viewed as slightly bullish.
Rob Kurzatkowski, Senior Commodity Analyst
