Debt Crisis Sacks Copper Prices
Fundamentals
Copper futures are higher this morning, following a two-day sell-off in which the price of the metal had dropped over 26 cents. With the exception of Gold, the commodity markets have been reeling due to concerns that the Greek financial crisis could turn into the European crisis and, eventually global crises, quashing demand for the base metal. In additional to the sovereign debt troubles, traders are also concerned that China may be much more aggressive in curbing real estate speculation. The US Dollar Index has rallied for the past 4 weeks, which has also played a part in keeping the price of the metal in check. The greenback continues to be a place of refuge for investors concerned about the current European situation. Until fears over the solvency of European debt abate, the greenback may very well keep gaining versus the Euro and other currencies. The move over the past two days was extremely sharp, pushing the price of Copper below $3. Some traders may view this sell-off as being a bit overdone, which may trigger some value buying in the near-term. Prices may have fallen too sharply too quickly given the relatively tight Chinese stockpiles of the metal. However, any inventory builds in either LME or Shanghai could send value buyers scurrying away from the market.
Trading Ideas
The fundamental outlook for the Copper market remains a bit blurry. On one hand, the rising dollar and efforts by Beijing to curb real estate speculation continue to pressure prices. On the other hand, Shanghai stockpiles of the base metal remain relatively tight, and there has not been any indication that Chinese users of Copper plan to curb purchases. The effects of the Greek/European crisis remain unknown at the moment, as one cannot point to any specific data showing the impact it has had on the Eurozone. The chart seems to favor the downside, but this is tempered by prices entering an area of support. For these reasons, some more conservative traders may be better suited on the sidelines. Some more aggressive traders may wish to consider selling the July Copper contract on a close below 2.8575, with a downside objective of 2.64 and a stop at 2.93. The trade risks roughly $1,812.50 for a potential profit of $5,437.50.
Technicals
Turning to the chart, we see the July Copper contract breaking out a pennant pattern on Friday and following up with a sharp sell-off yesterday. The pattern has already made its measured move due to the large swing in prices over the past two sessions. Prices did manage to close below the psychological support level at 3.00, but have held chart support at 2.8575. If the 2.8575 level is not held, prices could drift down to the low to mid 2.60's. The heavy selling pressure resulted in both the RSI and stochastics giving oversold readings, which could offer some temporary relief.
Robert Kurzatkowski, Senior Commodity Analyst
