Copper Futures Correct and the Bears Come Out of Hibernation Too Fast

 | Dec 06, 2017 | 12:01 PM EST
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Is the rally in copper over? Copper prices broke a six-year downtrend trend late last year and have recovered around a third of the prior decline. Futures have pulled back in recent sessions and the financial media has rushed in to put bears on TV for sound bites. The commentators and "analysts" they selected cited a rise in LME warehouse stocks as if one statistic is equals a complete supply/disposition analysis.

My eyes rolled. Sorry, but when I first graduated from university I landed a job at a commodity consulting company in New York. Commodities had entered a secular rise from growing global demand, stagnant supplies and a number of supply shocks. Maybe you remember the poor anchovy crop that boosted the price of soybean meal? The Russian wheat deal? The freeze of the oranges in Florida? The loss of half the coffee crop in Brazil? The rise of OPEC?

A proper supply/demand analysis of copper or any commodity would look at the sources of supply (beginning or carryover stocks plus production and any imports) and demand (domestic consumption and exports), which would leave you with ending stocks. In my role working for Real Money I do not have time do a full fundamental analysis on copper but I also do not have to accept just one statistic as good analysis.

Let's look at some copper charts and see what they might add to the discussion.

Source: Bloomberg

In this daily chart of the nearby (March) copper future, above, we can see how prices broke out on the upside in late 2016, which was followed by two strong rallies. Prices are below the cresting 50-day moving average line but above the rising 200-day line. A close below the rising 200-day average line would prompt me to change my outlook.

Source: Bloomberg

In this longer-term weekly chart of the nearby futures contract, above, we can see that a six-year downtrend was broken. The longer a trend is in force the more important that a break of the trend becomes. Prices are still above the rising 40-week moving average line.

Bottom line: Traders and market observers like to watch "Dr. Copper" for clues about the state of the global economy. It is simple and does not require a lot of heavy lifting or much analysis but you get what you pay for.

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