Chopiness Ahead?
Fundamentals
Copper futures have corrected since flirting with the $3 mark several times over the past two months. Traders have had plenty of time to reflect on the current market fundamentals, which have softened in recent months. China has made good on their promise to reign-in commodity buying, which has caused imports of the industrial metal to fall. LME stockpiles have risen for 11 consecutive weeks, and current inventory levels are nearly 33% higher than they were in mid-July. Yesterday's Chinese factory index data, while an improvement over August's figures, did fall short of analyst expectations. The Dollar Index was at a pivotal support area heading into the G-20 summit last week and seemed ripe for a meltdown, but the US currency found some stability during the past week after global leaders turned their attention to their own debt burdens and growth prospects. Copper bulls were disappointed by the metal's failure to break the $3 level, despite several attempts, which has caused them to step back and re-assess the previously mentioned fundamental factors.
The Copper outlook is not all doom and gloom, however. The recent correction has been a reflection of the mindset among not only Copper traders, but commodity traders as a whole that prices may be overheating. It is healthier for the market to pull back and attract buying interest rather than to keep pushing ahead of market fundamentals, only to implode down the road when high prices inhibit economic growth. While yesterday's Chinese factory index did fall short of expectations, manufacturing data from both China and Japan hint that demand for the red metal may increase down the road. Workers in BHP Billiton's Spence mine in Chile have threatened to strike, which could cause supply fears to creep into the market. The contradictory fundamental data suggests that traders may remain skittish and could result in sideways to lower trading for the remainder of the year.
Trading Ideas
The mixed fundamental and technical outlooks for the Copper market suggest that traders may possibly want to be cautious moving forward. The already volatile Copper market has seen large-range days with little overall direction, making it difficult for traders to formulate opinions with any sense of conviction. For this reason, traders may choose not to focus on long-term trade ideas, but rather look to go short the futures contract on rallies.
Technicals
The December Copper chart shows the market breaking near-term support near 2.7000, only to bounce back. If prices do fall below this support area once again, support can be found between 2.55 and 2.45. The December contract would have to close above the 3.00 level with conviction to signal an upside breakout. Prices did also drift below the 50-day moving average, which can be seen as negative in the near-term. It appears as though the 20-day moving average is going to cross below the 50-day moving average, which can be seen as negative over the intermediate future. The choppy price action recently has caused the oscillators to remain fairly neutral.
Rob Kurzatkowski, Senior Commodity Analyst
