Is the Rally in Copper Pointing to Improving Global Economic Conditions?
Fundamentals
Bullish traders have taken a liking to the Copper market lately, as prices in the lead month September futures have reached highs not seen since the middle of May. The Copper market has a reputation for being a leading indicator as to the strength or weakness of the global economy. Better than expected 2nd qtr GDP figures out of the U.K. as well as business confidence reading out of Germany gave further support to Copper in early trade on Friday. However, traders fixated on the results of the European Union's bank stress tests released late Friday morning. The results of the stress test showed that only 7 out of the 91 banks tested failed, with the majority of the banks located in Spain. In addition, one German and one Greek bank also failed the test. The results were about what most traders were expecting, allowing Copper to maintain its early gains. The red metal also received some support from steel futures, traded at the London Metal Exchange (LME), which reached 10-week highs as iron ore imports to China rose. The most recent Commitment of Traders report shows large non-commercial traders nearly doubling their net-long position in Copper futures as of July 13th, and this was before the recent price rise. It is believed that these large speculators may have increased their net-long position during the past several sessions. Further upward momentum may come from technical traders, as prices are hovering right around the 200-day moving average, which longer-term traders tend to watch as a determinant as to whether a market is in a bullish or bearish mode.
Trading Ideas
September Copper prices appear at a crossroads when viewed from a longer-term chart perspective. Either copper bulls will propel prices above the 200-day moving average and trigger momentum-based buying, or bears will exert pressure and the recent up-move will be relegated as a false breakout. Those bullish on Copper may wish to consider purchasing a September Copper futures contract, with a protective sell stop at the June 28th highs of 3.1060, as a close below this support level will likely send prices back into the recent trading range.
Technicals
Looking at the daily chart for September Copper, we notice the market trading above the downtrend line formed from the April highs. If we compare a daily chart to that of the September E-mini S&P 500 chart, we notice the similarity in the recent price movement. However, September Copper hit its interim bottom almost 1 month earlier than the S&P futures did! This lends some credence to the belief that the Copper market is a leading indicator of the economic health of the economy, and it will be interesting to see if the recent price breakout in Copper translates to an up-move in the S&P futures as well. The next resistance point for September Copper is seen at 3.2455, with support found at 3.1060.
Mike Zarembski, Senior Commodity Analyst
