Beware the Copper Meltdown

 | Apr 12, 2012 | 2:00 PM EDT
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Comex copper futures for May delivery this week slumped to a fresh three-month low of $3.6305 a pound. Prices have shed around $0.30 a pound in just over one week's time, from the early-April high of $3.9580. With nicknames such as "Dr. Copper" and "the market with a Ph.D. in economics," this important industrial metal does have a history of leading trending price moves not only in other raw commodity markets, but also the U.S. stock market.

Copper futures prices have been hit hard by last week's surprisingly weak U.S. jobs report, by fresh, weak economic data coming out of China and by the European Union sovereign debt crisis seeing the heat on its burner turned up a bit this week. The weakening copper market hints at weakening worldwide economic growth. Such would not only be bearish for other raw commodity markets, but also for the U.S. stock indexes.

From a technical perspective, the copper futures market this week has seen a bearish downside breakout from a sideways trading range on the daily chart that had been in place for three months. This technical breakout on the downside suggests still more price pressure for the copper market in the near term. For the near-term technical posture of the copper market to improve, nearby futures prices would have to push back above strong technical resistance at the $3.8500 level.

Another element corroborating copper's bearish tilt on the raw commodity sector is the daily chart for the Continuous Commodity Index (CCI). The CCI is basket of 17 major raw commodity futures prices rolled into one composite index price. The daily CCI chart shows prices in a steep six-week-old downtrend with the index notching a fresh nearly four-month low this week.

The latest downtrend in the CCI corresponds with the wording of a Federal Reserve statement a few weeks ago that suggested another round of quantitative easing of U.S. monetary policy was far from a sure thing. Commodity markets had been fueled the past three-plus years by the very easy money policy by the U.S. central bank that depressed the value of the U.S. dollar and in turn boosted raw commodity markets.

One more near-term negative for raw commodities has been sector leader Nymex crude oil being trapped in a six-week-old downtrend on the daily chart. If nearby crude oil prices see a daily close below what is now major psychological support at $100.00 per barrel, it would be another bearish signal for crude to suggest still more downside price pressure in the near term.

For the raw commodity sector to post any sustained general recovery, and for the U.S. stock indices to resume their near-term price uptrends, copper and crude oil will have to lead by showing strong price recoveries from their recent lows. Keep an extra close eye on Dr. Copper and crude.

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