Pessimism Not Slowing Copper Down
Fundamentals
Someone apparently forgot to tell the Copper market about the economic jitters engulfing the equity and commodity markets. The more pessimistic sentiment from central banks and concerns that China's real estate market may be softening have done little to slow down the price of the red metal in recent weeks. Copper did retreat last week after the FOMC policy statement, but traders have shifted their focus on the destocking of COMEX and LME inventories this week. Orders to take from the stockpiles on the two exchanges jumped to two-month highs, indicating that demand may remain resilient. Even if demand subsides, the supply side of the equation is becoming a question mark. It could take some time for stocks of the metal to be replenished, even if demand cools. Chinese economic growth is expected to fall to 9.2% annually, which is a sharp drop from the blistering 11.9% pace in the first quarter of the year. The industrial giant is still growing at three to four times the rate of most western nations, indicating there may not be a huge drop in demand. The residential housing market has not fallen as sharply as many had expected after the new restrictions on real estate speculation, which has been a pleasant surprise. The long-term impact of the real estate reforms has yet to be determined. The Copper market does, however, still have downside risk. It is difficult to discount the negative economic data in the US, Europe, and Japan in respect to how deteriorating conditions could adversely impact the growth of emerging markets. The US Dollar has been on the decline recently, which has aided the Copper market. A shift toward risk aversion could result in traders once again seeking the relative safety of the greenback.
Trading Ideas
It appears as though the supply and demand outlook for Copper has not yet succumbed to the deteriorating economic conditions gripping much of the world, mainly due to tight supplies. The chart shows near-term support being held, but not a new breakout. Some traders who maintain a bullish opinion on the market may wish to consider buying a December Copper future at the 3.30 or better, with an upside objective of 3.40 and a stop at 3.20. At these levels, the trade risks roughly $2,500 for a potential profit of $2,500.
Technicals
Turning to the chart, we see the December Copper contract giving back some of the July gains. Prices did manage to hold support at the 3.2195 level, and prices also failed to close below the 20-day moving average. These can both be seen as positive in the near-term. Traders may wish to keep a close eye on these levels, as regression below the 20-day and support at 3.2195 could trigger further selling, which could possibly send prices into the low $3.00's or lower. For the market to pick-up steam once again, prices may have to cross above the 3.42 level. Momentum is outpacing the RSI and prices, perhaps indicating the market may see some near-term support.
Robert Kurzatkowski, Trading Specialist
