Shanghai Jump Sends Long to the Exits
Fundamentals
A large jump in Shanghai inventory levels has given Copper traders a reason to step back and reassess the fundamental outlook for the metal. The 60,647 metric ton level is the highest Shanghai has seen in well over a year, which has left traders wondering if Chinese imports are going to keep up the rapid pace they have seen in recent months. The data also suggests that the destocking of LME has simply been the result of the metal being moved from London to Shanghai. We are entering a traditionally slow period of Chinese Copper consumption, suggesting inventory levels could continue to increase in coming weeks. This has taken the wind out of the sails of Copper bulls, who have pushed the price of the red metal higher on strong Chinese imports and industrial production. Supplies are still much lower than they were earlier this year, when LME inventories eclipsed the 550,000 metric ton level. On the economic front, G8 members have begun to explore the possibility of cutting back stimulus spending, which can be seen as negative for the price of the metal for two reasons: First, traders are getting a sense that the move could be premature, as economies around the globe are still mired in the economic downturn. Secondly, this could dim the outlook for inflation. Traders tend to focus on the US money supply and how a falling greenback can be a driver of inflation, since most commodities trade in dollars. What traders may have lost sight of is how other nations have pumped money into their economies. Economic tightening by European nations could result in stalled growth and cool inflationary pressures. The Copper and Crude Oil markets may have gotten a bit ahead of themselves in recent months on inflationary fears. Inflation, ultimately, is not driven by money supply, although it is an important component in the equation. It is driven by demand and the US and other industrialized nations still have to make huge strides to right the ship. The fundamental outlook for Copper has not turned bearish, but, rather, it is not quite as bullish as traders had previously thought. It has been a quiet overnight session, as things have cooled off in Shanghai after yesterday's limit down day. Any inclement news, however, may trigger more profit taking.
Trading Ideas
Given the near term bearish technicals and fundamental news, traders on the long side of the market could explore the possibility of lightening up or exiting the market. Traders not currently in the market may be better suited remaining on the sideline at this point until there is a clearer intermediate outlook.
Technicals
Turning to the chart, the July Copper contract shows a reversal pattern. This can be seen as a short term negative signal, though not a textbook key reversal orpossible trend reversal pattern. Prices are approaching the 20-day moving average. A close below the average could confirm a near term high and offer further validation of the reversal on the candlestick chart. The sharp sell-offs over the past two sessions have not done major chart damage to this point. Before reversing, the July contract reached the profit target line, which runs parallel to the bottom of the wedge formation. Traders should be mindful of the extension of this lower line, as it is the stop line and could trigger further selling.
Rob Kurzatkowski, Senior Commodity Analyst
