Risk Off Continues
Tuesday, November 22, 2011
The economic woes of the West and uncertainty as to whether China's recent imports of Copper were simply a shift in inventories have Copper traders on edge. Things continue to look worse for Europe the longer the debt situation stretches on. Even strong economies such as Germany face the prospect of increased borrowing costs, which could slow the robust manufacturing sector there. Technically, December Copper must hold the pivotal $3 level or prices could face immense selling pressure. Some traders may wish to continue to simply use Copper as a leading indicator to evaluate trading decisions in outside markets. Some traders with a high tolerance for risk may possibly wish to consider going short the December Copper contract on a breakout below the $3 mark
Fundamentals
Many traders have continued to take risk off the table, as the clock continues to tick for Europe to fix its sovereign debt problem. Many economists have been forecasting a mild recession for Europe from which the continent will recover quickly. Recent events have put the "mild" portion of the assessment into question, as risks mount, and Europe could see a lost decade akin to Japan in the 90's and the US in the 2000's. A prime example of the risk off is the Copper market, which has been unable to build on the momentum in late October. The market subsequently slid throughout November, and the market risks retesting October lows near the $3 level. The recent sell-off could trigger some value buying, as some traders may view the recent declines in prices as excessive. Many traders may also point to the fact that Copper imports by China increased last month. There is question as to whether the imports were simply a shift in inventories between the LME and Shanghai. Ideally, traders would like to see more consistent buying by the industrial giant. If the Chinese import increase is a one-off event, Copper could face significant selling pressure in the coming weeks.
Technical Notes
Turning to the chart, we see the price of the December Copper contract declining below recently established support near the 3.4500 level. Prices are now approaching psychological support at 3.2500, but the real test for the Copper market will come if and when prices test support at the $3 level. A breakout below $3 would be seen as a continuation of the downtrend that began in August and could bring with it significant selling pressure. The RSI indicator remains near oversold levels, which could be supportive for prices in the near-term.
Rob Kurzatkowski, Senior Commodity Analyst
