Base Metal Blemish?
Fundamentals
Copper prices have stagnated below the key 3.00 level, as investors are concerned that growing Chinese inventory levels may harm demand. Traders are also questioning whether the global economic recovery will be able to stimulate demand sufficiently to warrant price advances beyond the $3 mark in the near-term. Chinese Copper inventory levels are at currently 2-year highs, and Shanghai inventory levels are expected to show another build when data is released later this week. Recent Chinese stockpiling suggests that imports of the base metal may shrink in August, but to what degree imports will slow remains to be seen. Imports had dropped by 86,717 tons from June to July, but it is unlikely that August will see this large of a drop. Nonetheless, a drop of over 50,000 tons in August is not out of the question, despite strong demand from manufacturing and construction. Housing data in the US, which can be seen as a relatively minor influence on the overall Copper market at this point, has been encouraging, but hardly enough to push further price advances.
Copper may look to outside markets for price support in the near future. The suggestion that the US government deficit will grow at an even higher rate than previously thought does not bode well for the Dollar. Investors sold on a global economic recovery but skeptical about stock market valuations may increase their holdings of commodities. The Copper market, in particular, has been an avenue for US investors to participate in Chinese economic growth without having to delve into the Chinese equity market, either directly or through ETFs. Crude Oil prices will likely have a heavy influence on base metal prices, suggesting Copper traders should perhaps closely watch the movements of the petroleum market.
Trading Ideas
Although near-term technicals and fundamentals seem to be favoring the short side of the market, Copper has proven to be one of the most unpredictable markets. This suggests traders should remain cautious and manage their position and risk closely. For traders who desire to enter a short position, it may perhaps be wise to wait for a close below 2.74 and enter a stop at 2.85. The downside objective of the trade would be 2.55. Some longer-term traders may choose to remain on the sidelines at the moment and wait for a pullback in prices to levels in the 2.50 and 2.60 area to possibly enter the long side of the market. Conversely, if the chart does not confirm a bearish reversal, some traders may wait for closes above the 3.00 mark to signal an upside breakout. Copper fundamentals remain very strong over the long term, but the commodity's success may be its undoing in the near-term.
Technicals
The September Copper chart is beginning to show signs of potential weakness and may be in the midst of forming a small M-top formation. The market has taken a much needed breather over the past two weeks, consolidating between 2.75 and 2.95. Traders probably should not rush to judgment and enter the short side of the market before the M-top pattern is confirmed with a solid close below 2.7415, as the market could just be in consolidation mode before making further advances. The RSI indicator is showing very strong bearish divergence at the moment, indicating a negative near-term bias.
Rob Kurzatkowski, Senior Commodity Analyst
