COPPER TODAY: Showing great resilience as it consolidates

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Short term: Up
Medium term: Up
Long term: Down
Resistances:
R1 4889 Sep high
R2 5032 Jul high
R3 5091 Apr high
R4 5131 Mar high
R5 5358 Oct 2015 high
R6 5930 Jan 2017 high
R7 6045.50 Nov 2016 high/current high
Support:
S1 5681 50 DMA
S2 5668 20 DMA
S3 5505 38.2% Fibo Oct 16 low-Nov 16 high
S4 5131 Mar high
S5 4631 Apr low
S6 4483.50 Jun low
S7 4430 Feb low
S8 4318 Low so far
Legend:
DMA = Daily moving average

Fibo = Fibonacci retracement level

RSI = Relative strength index

H&S = head-and-shoulder formation

Analysis

  • Last week, copper attempted to break higher but found fresh supply.
  • Buying momentum stalled at $5,930 per tonne and selling interest has dominated since.
  • But the pullback has been kept above the rising 20 and 50 DMA, which are acting as nearby support.
  • A break below these moving averages may well jeopardise the October 2016 low uptrend line and perhaps attract further selling pressure.
  • For further upside, copper will need to take out psychological overhead resistance at $6,000 per tonne and then the November 2016 high at $6,045.50.
  • Meanwhile, the other technical configuration such as the daily RSI and stochastic lines are meandering sideways with no clear direction yet.

Macro drivers

Like tin and nickel prices, Copper closed last week lower as selling pressure dominates. Lead and zinc was almost flat but the best performer was aluminium. The base metals complex showed mixed results despite a weaker dollar index post-January 20 inauguration day. With Donald Trump taking office, there are still no sign that the market is turning risk-off. Instead, the global economy is showing some resilient as risky assets are generally steady and consolidating well from its recent gains.

Copper’s net long fund position enjoyed a brief uptick at the start of the trading year but this was followed by a decline of 2,101 lots based on January 13 data. Over this period, the metal rallied higher mainly due to short-covering of 5,250 lots, taking net shorts to fresh low. Worryingly, there was no fresh buying as longs liquidated 7,351 lots, and based on the current downtrend, net longs are likely to reduce their exposure further. Going forward, copper’s net long fund position (NLFP) could decline if longs continue to liquidate while shorts start to rebuild their positions.

Contango in the cash/three-month spread was easing steadily since the start of the trading year, from $13.50c to the high at 28.50c. But judging from activity on January 16-20, it has started to tighten again from the high and currently stands at $18c only. Perhaps lending capacity has started to tighten up again given the presence of a dominant holder that held 80-89% of the warrant. The most recent LME data also showed that there is one dominant holder in both the tom and cash positions holding 50-79% level. Nevertheless, the January contract is still dominated by longs, with four entities collectively holding 25% of the open interest against the 20% by shorts. With sufficient longs, tightness in the nearby spread may be temporary.

Meanwhile, the physical premiums for copper stayed relatively flat at low levels across Asia, Europe and the USA. It is unsurprising to see subdued trading activity with most in Asia winding down for the Lunar New Year Festival. In Europe, there is a lot of primary and secondary copper being offered in the market right now, suppressing any upside in premiums there. The US market saw US Midwest premiums again at 5.0-5.25 cents per lb. Ample supply, high LME prices and largely well stocked consumers are part of the reason. Nonetheless, most market participants hope that things will start to pick up again in February.

Total LME stocks were recovering higher at 345,475 tonnes by the end of last year. But since then, it has been on a steady decline to just 274,650 tonnes. Cancelled warrants has also edged lower, trading near the November 2016 low at 74,800 tonnes while available stocks now stand at 199,850 tonnes.

Conclusion

Concern over supply disruptions in Chile and generally better than expected economic data across the developed economies are supporting copper prices. Judging by the mild pullback and speculative funds positioning, there is little evidence that sentiment has turned bearish towards the metal yet. Therefore, we remain cautiously bullish towards the red metal.

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