Technicals | Jun 06 2024
By Carley Garner, DeCarleyTrading.com
For some reason, when things are good, we all point to copper prices to confirm our bullish bias. Yet, when the copper market shows signs of weakness, we shrug it off as an obsolete indication of economic health.
In the good ol’ days, the industrial metal was referred to as Dr. Copper because it was a bellwether of economic growth. Over time, that narrative has proven itself to be merely mildly accurate.
Nevertheless, the market can and does talk to us if we take the time to listen and recognize the tendency for stocks to lag copper tops and bottoms. We believe the abrupt reversal in copper could be a warning signal for the stock rally.
Before delving into the weekly chart of copper, let’s look at a 50-year history of the quintessential industrial metal.
Prior to 2000, copper mostly hovered between US50 cents and US$1.50. The pivot line created by the pre-2000 trading range has stood the test of time. Aside from a minor blip during the financial crisis, copper has held firmly above it.
That line currently comes in at just over US$2.00; while we don’t expect that to be a realistic target for the bears, the risk of such a move should be respected. In fact, the covid low just four years ago was US$2.07.
Never forget that commodities don’t trade like stocks; they trade sideways most of the time. On the upside, the historical trend line is near US$5.35, just over the US$5.20 high achieved in late May. This trend line began in 2007 before the financial crisis and has managed to contain prices since.
While it is possible the market has a last hurrah rally to test the trend line fully, the highs are likely either in or near.
Copper is often a few steps ahead of stocks; copper futures frequently find a significant high or low a handful of months before the stock market does. Thus, the metal can be seen as a leader, but with a substantial lag.
In May 2021, copper futures rose sharply before peaking near US$4.90. About seven months later, the equity markets rolled over and underwent a sizable correction. We suspect the May 2024 reversal might be a repeat.
If so, we would expect prices to initially retreat to the US$4.00/US$4.10 area, but if/when stocks roll over, the selling could resume to the trend line near US$3.80. Should selling get out of hand, US$3.50 is in play; this price has been historically pivotal. Prices tend to behave bullishly above and bearish below.
The RSI, which violently entered overbought territory last month and has since rolled over, supports the argument for lower copper prices. Further, the 200-week moving average will act as a price magnet; it is currently near US$4.00.
In addition to technical headwinds, the market is already positioned for higher copper prices. This might mean the buying has exhausted itself, leaving copper futures vulnerable to mass liquidation.
According to the COT Report (Commitments of Traders) issued by the CFTC (Commodity Futures Trading Commission), large speculators are net short over 70,000 futures contracts. In the past, when we saw this group hold such an aggressively bullish position, prices were near a peak.
There are plenty of reasons to be bullish about copper. It is a prominent industrial metal used in emerging technologies such as green energy. Yet, history suggests all the good news has probably been priced in. Copper might retrace well below US$4.00 if the stock market euphoria tapers.
*There is substantial risk of loss in trading futures and options. There are no guarantees in speculation; most people lose money trading commodities. Past performance is not indicative of future results.
DeCarley Trading (a division of Zaner)
Twitter:@carleygarner
info@decarleytrading.com
Views expressed are not by association FNArena's.
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