Just over a couple of weeks ago, I wrote a post about copper entitled – Dr copper requires some medical attention. Well I guess this can now be updated to say that copper is now in intensive care. At the time I suggested that if the $3.3500 region were breached then we could see a test of the $3.000 region in due course, and this now seems to be increasingly likely, as copper futures continued to sell off hard once again yesterday, with the May futures contract closing at $3.1875 per pound and a wide spread down candle. The red metal has continued moving lower still in overnight trading, as we test the $3.1000 per pound area on the daily chart, and looking at the volume at price histogram on the left hand side of the chart, it’s not hard to see why.
The deep and extensive area of price congestion now overhead will present a formidable barrier to any recover for the metal in the short term. Not only are the congestion volumes significant, they also extend from the $3.4000 region all the way through to the $3.8000 area, and for this area to be breached will required two clear signals on the daily chart.
First we will need to see a sustained period of price congestion, initially on high volumes which will then provide clues to any buying climax from the large operators. Once this phase is complete, then the second step will be a breakout from the price congestion on strong and rising volume in order to provide the required momentum to break higher and through the deep barriers of price resistance now above. In this respect, it has been revealing to see the ultra high volume which appeared on the chart on Monday, with the price action closing with a deep lower wick, suggesting buyers coming to the market. The volume yesterday, whilst high, was lower than that on Monday, suggesting a possible decline in selling pressure – but then everything is relative!
It is also interesting to see the overnight price action, which appears to be following a similar pattern with the lower wick suggestive of support at this price level. However, markets never reverse on a sixpence, and the $3.000 level is now key. If this is breached then this will add further pressure to the move lower, and send copper below a psychological price region.
The other aspect of the current decline in copper prices causing some concern is the once reliable correlation between the metal and the economy from which it derived its tag of Dr Copper. The positive correlation between the metal and the S & P 500, has now completely broken down with the index rising and copper prices falling. The question now of course is whether it is copper that has disconnected from the S & P or the other way round! Time will tell, and perhaps in the future, this relationship will reconnect once again. But for the time being the metal is no longer an indicator of economic growth, but more the sick man in the commodities ward.
By Anna Coulling
I am following your posting. Really it has educative value and your suggestions hold good. I appreciate the heading doctor copper needs medical attention. Moreover I am inspired by your question whether the correlation between copper and S&P is disconnected or other way. Good.
Hi Gopathy – many thanks for your kind comments which are much appreciated and I hope that you find some of my other forecasts and market analysis helpful to you as well. I try to cover all the main commodities and currencies as well as stocks from time to time, but if you have a particular market that you would like me to consider, please just let me know – more than happy to help. Thanks again and all best wishes Anna