Copper: A Burnished Base Metal?

Copper prices have pulled back from near-term highs over the $2.20 area on a firming US Dollar and pullback in equity prices. The weakness seen over the past week can also be attributed to profit-taking by longs after a rise of 75 cents since the beginning of March. The LME has seen inventory levels drop by nearly 50,000 metric tons since the beginning of the month, driven by Chinese buying. The question that traders have been asking themselves is whether Chinese growth is driving the buying or whether the industrial giant is using its massive currency reserves to restock.

Given the lackluster Chinese GDP number released last week, there is a growing contingent of traders that believe that China has taken advantage of the global downturn to purchase materials at relatively low cost for future use, rather than seeing an increase in immediate use. This may also be a way for the nation to put its currency reserves to use and, at the same time, avoiding foreign exchange risk. In the US, housing data has been improving significantly. As we have discussed in the past, the residential housing market can be seen as a barometer of future economic activity. Just as the housing slump foretold of the troubles awaiting the banking sector and overall economy, stability in the housing market could be an indication that the economy is finally hitting bottom. While housing may be encouraging for Copper bulls, industrial production in both the US and Europe has been troubling.

This is especially true for continental Europe, where industrial production has fallen off a cliff, reaching lows not seen since statistics for the region began being recorded in 1990. This, however, could be seen as limiting upside potential for Copper prices, rather than a statistic that can drive prices lower in and of itself. Copper prices will likely be taking their cue from the equity market for the foreseeable future, barring new market developments. Two reports that traders will be closely watching will be tomorrow’s Durable Goods Orders and New Home Sales. Durable Goods Orders are expected to see a contraction of 1.5 percent according to analyst estimates. New Home Sales are forecast to rise to an annual pace of 340,000 from the 337,000 seen last month.

Trading Ideas

Both technical and fundamental factors remain positive for the Copper market, but the recent rise in prices may reign-in rallies. Also, it is difficult to gauge the scope of a potential move higher. Traders that are bullish may wish to explore entering a bull put spread with strike prices below near-term support. A potential spread that some traders may wish to consider could be selling a July 1.75 put and buying a July 1.65 put, for a credit of 0.0250, or $625. If the price of the July contract remains above 1.75 on the June 25th expiration date, the trade would keep the initial credit. The trader would risk $1,875 if the price of the future closed below 1.65 at expiration.

Technicals

The recent weakness in prices has not done any significant chart damage. The July Copper contract has come down to test recently established support at the 2.0095 market several times over the past three sessions, only to rebound. This can be seen as a healthy pullback and a better scenario for traders than a parabolic rise. Also, the uptrend line that began in late February remains intact. If prices cannot hold support at 2.00, there is an untested support level at 1.8640 that could act as a deciding factor for the overall market trend. The selling pressure the market felt last week can also be attributed to technically overbought levels on the RSI. The RSI has now fallen back to neutral levels, suggesting prices may be set to move higher.

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