Copper prices rallied sharply last week and broke above a number of key resistance levels. In particular, they pushed above their 200 day moving average (on Wednesday), and then above the top of their downtrend channel (on Friday), see fig 1. That’s bullish price action, especially with copper having tested and rallied from its August lows last month (fig 1).
As is well known, ‘short copper’ has been a popular way of playing a bearish view on China in recent years. That view, though, has become a widely held/consensus one. Illustrating that, measured sentiment has fallen to reasonably low/bearish levels, while contango in the curve has become extreme (i.e. reflecting the market’s view that there’s a surplus of copper supply in the physical market). Net speculative positioning, in that respect, is also low (fig 1a).
As such, and given early signs that the Chinese economy is starting to bounce (e.g. see the pick-up in money supply growth), the case for further upside in copper prices over coming months is reasonably strong. Risks naturally are multiple and include the positioning of our short-term models (which highlight the potential for some near term giveback). In particular, with the price up 14% YTD, copper is overbought in the short term (e.g. see our technical copper model, which is on SELL/close to strong SELL, fig 1b).
Fig 1: Copper candlestick futures, shown with 50 & 200 day moving averages
Fig 1a: Copper net speculative positioning vs. copper price (US$/lb)
Fig 1b: Short term technical scoring system vs. copper price (US$/lb)
