Copper prices found support in August at around their 200 day moving average (fig 1). They then rallied 22% from the August low to the September high. Of interest, the price topped shortly after the recent news of Chinese stimulus in late September (i.e. about a week after that newsflow). That’s often the way in markets, which are forward looking. They therefore rally in anticipation of bullish newsflow, but then top once it’s released.
In that respect, bullish positioning in copper had been building for a number of weeks before the Chinese stimulus measures were announced. That is, net LONG positioning had increased from 39.6k on 23rd September to 52.3k (see fig 1a). Several other models were also generating (contrarian) SELL signals at around the highs in the copper price. Summarising that, our copper market timing model was/remains close to its SELL threshold (fig 1b).
Added to which, Chinese stimulus measures have been somewhat disappointing. In our view, the measures announced in late September are the wrong type (and size) of support. Furthermore, the announcement this Saturday in Beijing didn’t provide any detail as to the size of the total package. That is, it was simply a discussion of intended programs (e.g. to offer subsidies to people with low incomes, support the property market and replenish state banks’ capital). Given the models and positioning set up noted above, therefore, copper price risks are skewed to the downside.
Fig 1: Copper candlestick futures, shown with 50 & 200 day moving averages
Fig 1a: Copper net speculative positioning vs. copper price (US$/lb)
Fig 1b: Copper market timing model vs. copper price (US$/lb)
