COPPER TODAY – Should you trust the rebound?

Short Term:
Medium Term:
Long Term:
Resistances:
R1 4,678 20 DMA
R2 4,748 100 DMA
R3 5,032 July high
R4 5,091 April high
R5 5,131 2016 high (March)
Support:
20 4,678
100 4,748
50 4,785
Support:
S1 4,600 Short-term support
S2 4,586 UTL (blue line)
S3 4,484 June low
S4 4,444 2015 low
S5 4,354 2016 low
Stochastics:
Legend:

Technical Comment

Momentum has turned positive, which could suggest a new uptrend. But ADX is falling further below 20 so the current trend remains presently weak.

Analysis

  • Copper has strengthened after finding support at its UTL, which could suggest underlying buying pressure. Still, we remain cautious in near term while the technical picture remains weak, with all key moving averages pointing lower. We cannot rule out the possibility that this rebound will be temporary before a new sell-off.
  • Taking a broader look, a (bearish) reversal triple-top could be forming, with the first top in March, the second in April and the third possibly the July high. Should this pattern prove valid, copper could sell off strongly toward its 2016 low.
  • On the upside, copper’s challenge is to move firmly above its 20 DMA to shore up sentiment. It would then need to move above the psychological $5,000 mark to change the trend. On the downside, we will closely monitor the UTL, a break of which could send copper to its next critical support level at the June low. If this gives way, we would not be surprised by an intense sell-off toward $4,500.

Macro drivers

Copper rebounded well on Monday after falling to an intraday low below $4,600 early in the session. This sudden rebound was probably driven by short-covering after financial markets showed signs of stabilisation, supported by dovish messages from Fed officials, most notably governor Lael Brainard. These eased investors fears about an imminent Fed rate increase – the estimated probability of a September Fed rate increase dropped to 15 percent from 24 percent.

China has shown further signs of economic stabilisation – the latest activity data for August (retail sales, FAI and industrial production) surprised on the upside. This should underpin Monday’s  price gains because longs may be inclined to rebuild some exposure.

A five-day strike at Codelco’s El Salvador (49,000 tonnes per year) ended on Friday but industrial action at Anglo American’s Los Bronces (437,800 tonnes per year) continues. Considering the elevated risk of production disruptions, copper could continue to strengthen in the near term although the macro is likely to play the most dominant role.

SHFE stocks at 143,716 tonnes were down six percent from last week after falling eight percent in August. Physical premiums are also trending higher – large shipments from Chinese smelters to the LME system seem to have tightened the Chinese domestic market.

But supply remains ample in the West. LME stocks at 353,275 tonnes are already nearly 16 percent higher this month after jumping 45 percent in August due to series of deliveries into South Korea, highlighting poor demand. The contango in nearby spreads continues to widen, with c/3s closing on Monday at $19.25 contango compared with $10.00 at the start of September.

Speculative sentiment in Comex copper deteriorated further in the week to September 2 through a large build-up of shorts. This could signal a negative swing in trend (see our latest COTR including charts).

Latest statistics

  • The deficit in the global refined copper market widened in May, ICSG statistics show (see our latest analysis).
  • Chinese copper ore and concentrate imports of 1.45 million tonnes in August were up five percent month-on-month and 26 percent year-on-year.
  • China’s unwrought copper and semi imports totalled 298,000 tonnes in August, down three percent from last month but up 0.9 percent from last year.

Conclusion

Although we acknowledge renewed strength in copper, we remain bearish for the near term, seeing the recent increase in prices as merely the result of tactical short-covering rather than an improvement in the fundamentals. Should copper continue to show signs of resilience in terms of price and duration, though, we would be forced to reassess.

As a reminder, we implemented on July 18 a short position at $4,900 and an initial target profit at the June low.

See our latest copper spotlight, published on September 5.

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.