Copper is getting into a habit of being a lagging follower rather than a leader. So many market participants look to the red metal for clues about the health of the global economy. Copper has a long history of diagnosing economic conditions, and that is why many still refer to the red metal as Doctor Copper. However, in 2016 when other base metals prices were flying high, copper was circumspect, and it only rallied late in the year after many other commodities and those that trade alongside copper on the LME had already posted dramatic gains.
Right now, copper is quietly sitting at a level that is close to recent lows, and the industrial commodity has been flirting with critical technical support. It took copper the better part of ten months to break out above the $2.32 level last year which stood as key resistance and now if it breaks below $2.45 per pound it could be on its way back to that level that has become critical support. On Wednesday, May 17 the stock market fell dramatically under the weight of problems plaguing the administration in Washington, D.C., and that could be bad news for the red metal over the days and weeks ahead.
A February peak for the red metal
In February 2011, copper reached its all-time peak at $4.6495 per pound and the red metal proceeded to make lower lows and lower highs until reaching a bottom at $1.9355 in January 2016. >Source: CQG
As the monthly chart highlights, the red metal spent the next ten months consolidating from around $2 to $2.3145 per pound. Finally, in November 2016, the price broke through technical resistance at just under $2.32 and rallied to highs of $2.8230 in February 2017. Since then, copper has moved lower for four straight months, and momentum on the monthly pictorial has shifted lower as the slow stochastic has crossed to the downside in overbought territory. From a long term perspective, copper was not able to challenge the next level of resistance at $2.9610; the May 2015 highs and has declined to below $2.60.> Source: CQG
The weekly chart shows that the red metal has been making lower highs and lower lows since February and while the momentum indicator has dropped into oversold territory it continues to signal a bearish trend in the base metal. At the same time, open interest has declined with price which tends to indicate that the price action is not the beginning of a bearish trend. Copper has been slowly grinding lower over recent months, and it could be ready to revisit a channel of support it has not seen in 2017.
A channel of support that could act as a magnet
The monthly chart for COMEX copper shows that support is currently at the $2.45 per pound level, the December 2016 lows. The lows for the year came in early January at $2.4725 which stood until the week of May 8 when the nonferrous metal traded to a lower low at $2.47. If copper decides to trade below $2.45, the next level of support will be at the $2.3145 support level that was resistance when copper finally decided to move to the upside in the aftermath of the November 2016 presidential election in the United States. $2.45 to $2.32 could become a range that tests the mettle of the base metal.
LME stocks not as important as recent months
Copper moved higher late last year along with most other industrial metals, minerals, and commodities. On the campaign trial, President Trump promised the biggest infrastructure rebuilding project in the U.S. since the Eisenhower Administration in the 1950s. The President and his Secretary of Transportation, Elizabeth Chou, have pledged $1 trillion in infrastructure spending to rebuild the crumbling roads, bridges, tunnels, rails, and airports in the nation. Moreover, the promise of a security wall along the southern border of the country is yet another massive construction project that will require lots of industrial commodities. However, as the President prepares to enter his fourth month in office, rather than draining the swamp in Washington, D.C., he finds himself in a position where his administration could be sinking into the murky political muck of the nation's capital. Without rehashing the details of the President's travails, his present challenges have put many of his campaign pledges on the back-burner as he fights for his political life.
When copper was in bullish mode a few short months ago, the price was moving higher and lower on almost a daily basis with changes in the inventory numbers on the London Metals Exchange. Recently, we have still seen the price of copper tracking LME stocks, but the trajectory of price has not been as dramatic as it has been over recent months. >Copper stocks on the LME ranged from 259,000 to 269,000 tons over the past 30 days. Inventories then suddenly increased at the beginning of May.> Source: CQG
As the daily chart highlights, COMEX copper futures moved from $2.50 to just under $2.70 per pound from the middle of April until the very beginning of May as stocks were below 270,000 tons. When inventories suddenly jumped to over 350,000 tons, the price of copper tanked falling to lows of $2.4725 on the July futures contract on May 8, the most recent low. Copper has recovered back to the $2.55 level as the stockpile numbers have been declining over recent sessions, but the inventories may soon take a back seat to other issues that could cause volatility in the price of the red metal.
China and U.S. domestic policy will dominate the path of least resistance for copper and other base metals
As a base metal that is a staple building block for infrastructure around the world, copper will take clues from the economic data in both China and the United States. Over recent year China, the world's largest commodities consumer because of its population and growth has been the chief determinate of the path of least resistance for the price of copper. As the Chinese economy cooled over recent years, copper entered into a bear market that took the price to last January's lows. China caught an economic cold and copper caught a case of pneumonia, falling by over 58% from 2011 through the beginning of 2016.
However, it was the promise of U.S. infrastructure rebuilding that caused the most recent rally in the red metal. While economic growth in the U.S. and China and the potential for legislation that fulfills the promises of the Trump Administration will dictate the path of least resistance for the price of copper, it now seems that there could be a bumpy road ahead. Given that the administration and Congress are becoming distracted with the politics of controversy. Meanwhile, the move in the stock market on Wednesday, May 17, could prove the biggest test for copper.
The stock market poses a great danger for copper
Stocks were roaring with the major indices making new highs on almost a daily basis until May 17 when the political travails of the Trump administration finally took the wind out of the bullish sails of the equities market. Copper has a long history of reacting poorly to significant stock market corrections. In 2008, during the global financial crisis, the price of the red metal fell from $4.2160 in May to lows of $1.2475 in December of the same year. More recently, weakness in the Chinese stock market in early 2016, took copper to its lows at $1.9355. There are many other examples in history of downside spike moves in copper when the equity markets have hit the skids. In 1987 copper fell on the day the market crashed. During the tech bubble and sovereign debt crisis in the late 1990s, the price of copper moved significantly lower.
Right now, the stock market poses the biggest danger for the copper market. If the May 17 selloff turns out to be a one or two-day event, we are likely to see copper hold above support at $2.45 but if the correction takes the market significantly lower expect copper to revisit the critical support at $2.3145. Copper is waiting for either an uptick in economic growth in China or legislation for infrastructure rebuilding in the United States. Meanwhile, the price has been drifting lower since February. A swoon in the stock market will be terrible news for copper bulls that are likely to find themselves scrambling for exits from their long positions.
Copper has been flirting with technical support over recent weeks; a bearish correction in equities is likely to push the base metal and other industrial commodities off the ledge of a cliff of that support. A bear market in stocks will be a lot stronger influence than a weak dollar or any movements in stockpiles . Therefore, copper is likely to be a follower rather than a leader when it comes to the stock market over coming sessions.
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Source : https://seekingalpha.com/article/4074333-coppers-flirting-support-watch-stock-market