Copper futures broke out to the highest levels since early October of last year on upbeat economic data. Recent US housing data has shown significant improvement in recent reports, reversing the tide of worse than expected data. Economists have been much more upbeat about the state of the US and global economies, as evidenced by bullish statements from former Fed Chairman Alan Greenspan, who stated that the downturn may be ending more quickly than previously thought. Chinese manufacturing data also suggests that the sector is experiencing its fourth month of growth. The July Chinese Purchasing Managers' Index rose to 52.8 from 51.8 in June, which is the fourth consecutive rise in the index. Readings above the 50 mark indicate economic expansion. The meltdown in the US Dollar Index has also aided the strong rally in commodities during the past two sessions. The rate at which the US government has been spending money has not slowed, despite assurances from several government officials, suggesting the path of least resistance for the greenback may be lower.
While the previously mentioned factors can all be seen as bullish for Copper, there are several factors that could put the brakes on the rally. Inventory levels at the LME and Shanghai have both risen, indicating stockpiling of the metal. When looking at the imports of Copper versus actual Chinese consumption, it looks as though there may be quite a bit of non-reportable stockpiling as well. Eventually, this stockpiling could result in high enough inventory levels to cool purchases. US housing data has been very erratic, and there is no guarantee that the recent trend toward a recovery will not reverse course once again. Higher commodity prices could also inhibit economic growth and extend the recession.
While both technical and fundamental factors are supportive of Copper prices, the sharp rise in prices suggests traders may wish to remain on the sidelines for the time being. Traders that wish to enter the long side of the market must keep in mind that there is high risk in doing so. Because of this, some traders may choose to consider using options to protect a long futures position, which has higher risk itself because of the lack of liquidity in the Copper options market. Traders who are considering being long the futures may wish to purchase a September 2.60 put (HGU92.6P) and sell a September 2.85 call (HGU92.85C) for even money, thereby possibly limiting downside risk to 2.60, and limiting maximum profit to 2.85.
Turning to the September Copper chart, we see the market breaking out above the recent high close of 2.5450. Prices have also eclipsed the 50% Fibonacci retracement level of 2.6654 this morning. If prices are able to hold this level, it suggests the market may be heading toward a test of the $3.00 mark. The fact that the Sep Copper contract is breaking out on overbought levels on the RSI indicator can be seen as especially strong. The oscillator may get up to readings well into the 90's before the market sees selling pressure.
Rob Kurzatkowski, Senior Commodity Analyst