Watch Out! Copper Could Be a Bull Trap

 | Jul 27, 2017 | 2:00 PM EDT
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This commentary originally appeared on Real Money Pro at 1:00 p.m. on July 27. Click here to learn about this dynamic market information service for active traders.

It is easy to get excited when copper makes a large move higher. After all, copper is considered a bellwether indicator for the overall health of the economy. In theory, when copper is in high demand and prices are firm, the economy is on the right track. On the flip side, when copper is struggling to find footing economic growth is likely similarly shaky. Thus, many are viewing the recent copper run as a sign that the economy is firing on all cylinders.

Although the positive correlation between copper and the economy isn't nearly as distinct as most would like to believe, we can see at least some merit in the theory. Nevertheless, there are other forces at play when it comes to the price of copper that can distort the correlation. For instance, valuation in the U.S. dollar can significantly impact the price of copper with all else on the supply and demand front being equal. In fact, over the previous 30 trading days, copper and the U.S. dollar have closed in opposite directions roughly 89% of the time. In short, as the dollar has fallen to fresh 2017 lows the price of copper has been a direct beneficiary, posting new multi-year highs. In our view, the greenback is likely at, or at least near, an intermediate low. If we are correct about a looming dollar rally, the price of copper should suffer.

U.S. Dollar Weekly Chart
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In addition to the potential of a currency reversal working against the price of copper, we noticed that seasonal tendencies begin to turn bearish on or about July 31st. Our friends at MRCI (Moore Research Center, Inc.) point out that selling December copper futures on the 31st of July and offsetting the trade on, or about, the 18th of August has yielded a profit roughly 87% of the time in the previous 15 years. Of course, this seasonal pattern only spans a few weeks but copper is a quick-moving market. A lot can happen in a few weeks!

The copper chart isn't quite as convincing as the dollar chart and seasonal stats but it is clear the copper rally is facing some headwinds. The price of copper is currently in breakout territory but based on other factors we've analyzed we suspect the breakout will prove to be nothing more than a bull trap. The current price of $2.88 per pound might make its way a little higher as the shorts are squeezed out of the market and margin calls are met with forced buying (offsetting of bearish trades), but the upside in copper is likely limited. We see resistance at $3.00 per pound, with the off-chance it could seek $3.08 on a temporary probe higher but this is not expected.

In any case, we don't believe now is the time to be bullish copper. The best trades will likely be reserved for the bears. Ironically, we noticed that those polled by the Consensus commodity opinion index were rather highly bullish with 63% of those polled looking for higher copper prices. Generally speaking, when the index reaches 70% to 75% bullish it is often a sign that the bull market could be exhausting itself; be on the lookout for a reversal in copper.

Remember, there is a substantial risk of loss in trading commodity futures, options, and ETFs. Seasonal tendencies are already priced into market values.

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