Don't count Dr. Copper out.
Economic pessimism is running rampant; as a result, the commodity many consider to be the growth bellwether has struggled. After an impressive early 2023 rally to the $4.30 area, copper futures have retreated over 60 cents. Yet, the fundamental stories that lifted the industrial metal earlier in the year haven't disappeared, and, in the meantime, we've seen the U.S. dollar weaken, risk assets (namely stock indexes) firm up, and interest rate volatility decline. In other words, the fundamental backdrop is supportive, and the price chart is beginning to look attractive as well.
Charting Copper by the Week
The weekly time frame allows us to see the big picture. Although it's been complicated, the overall uptrend started in early 2020 after economic fallouts from the Covid shutdowns. We tested the uptrend line in the summer and fall of 2022 and are approaching it again. The trendline suggests $3.60 is supportive, but we also find the 200-week moving average at $3.60. This line is representative of the line in the sand between a bull and bear market. Thus, if the fundamental story is bullish, as we believe it to be, prices should remain above this price. That said, markets are messy. A temporary breach -- but a weekly close -- above $3.60 doesn't negate the bullish theory.
Charting Copper by Day
In the shorter time frame, copper futures also appear to be poised for a rebound. Based on the July contract, trendline support comes in near $3.65 (slightly higher than the figure depicted from the weekly chart). Further, while the market is trading below its 200-day moving average, temporary breeches aren't a game changer. (This is unlike with the 200-week moving average.) Should support hold and prices trade back above the 200-day moving average (about $3.80) in the coming weeks, the resulting upward momentum could overwhelm the bears.
The 'Big' Commitment of Traders
According to the Commitment of Traders Report (COT), large speculators (a group within the COT Report categorized by those with positions large enough to exceed exchange reportable limits) are net short copper futures. Historically, when this group of speculators have amassed short positions, the downside in copper pricing is generally limited in scope and time. Of course, it isn't necessarily a buy signal, but it can certainly be considered a "stand by" signal for the bulls.
Statistically, copper tends to find a low in late-June but the bigger up moves generally occur in the fall. Nevertheless, seasonality should increase the odds of technical support holding.
Copper prices have fallen victim to its ties to Chinese consumption and the country's weaker than expected post-Covid reopening, but we believe the vulnerability is near-sided. Once speculation on the Chinese reopening is fully liquidated and the market is left to stand on its own two feet, we believe the bulls will come out ahead. We suspect the downside is limited to $3.60 should the dollar continue to behave poorly, and the equity market hold up. On the contrary, if we are wrong about a weak dollar and firm equities, the copper market might test $3.30 or even $3.00 support, so traders should keep this in mind when putting a strategy together.