- Copper prices have been oscillating sideways in a large triangle pattern since March. They breached the lower level on September 12 but left an underlying tail behind and promptly rebounded.
- Three-month prices breached the UTL again on Thursday, Friday and Monday but not by much and they have since rebounded strongly from it. Overall, then, it does look to be a strong support line – it is also the long-term UTL dating back to 2001-2002.
- The stochastics have turned bullish but prices are still below the downward-sloping 20 DMA.
- We expect the overall sideways trading to continue but another run to the top of the triangle would be bullish. The apex of the triangle reaches out to January 23, 2017, so sideways trading could continue for some time to come.
Copper prices have been under pressure and there were reports of CTA-type liquidation in recent days. Liquidation is one thing but last Friday’s CFTC report showed heavy short selling too, with 23,871 contracts shorted, which was slightly countered by 8,403 contracts of fresh buying. LME COTR data for last week showed 2,481 lots of long liquidation and 1,708 lots of short selling. With prices failing to break lower and now bouncing, there is an increased risk of short-covering, which could well give prices the energy to run to the top of the triangle again.
The large inflow of metal into LME-registered warehouses has slowed but there is still some inflow. We expect this to dry up now that the LME/SHFE copper arbitrage window has reopened. Given the run-up in cancelled warrants to 112,700 tonnes from a low of 38,975 tonnes at the end of August, we expect outflow from LME-bonded warehouses to grow – the metal will head back to China. This should help support LME prices. Today’s stock data showed 12,3125 tonnes of warrants cancelled across four Asian locations.
SHFE copper stocks dropped 3,805 tonnes last week to 117,634 tonnes – stocks have fallen steadily from just shy of 400,000 tonnes earlier in the year.
The c-3s spread has tightened, suggesting short-covering – it was recently quoted at $11.35-11.25 per tonne contango, having averaged $20.75c last week.
There was one large holder of warrants last week at 50-79% of the stock but there are now no large holders of warrants or nearby positions. That is a significant amount of metal to change hands.
Copper prices have tested support; they held and are now rebounding. Given the short selling by funds on Comex, there may well be short-covering to do. As well, the run-up in cancelled warrants and the opening of the arb window are bullish factors. PMI and other data has generally been favourable, which bodes well for demand – we remain quietly bullish for copper.