In my last copper update in November 2014, I warned that copper could plunge in tandem with oil after it sliced beneath its long-term psychological support level of $3 per pound. Since then, copper fell from $2.84 per pound to just over $2.40 before rebounding to $2.69. China’s economic bubble and related risk of a hard landing, the U.S. dollar’s powerful surge, and the ending of the overall commodities bubble are all reasons why I have been warning about downside risks for copper in recent years. Copper is often called “Dr. Copper – the metal with a PhD. in economics” because it tends to be an accurate barometer of global economic activity, which is why I pay close attention to it.
From a technical perspective, copper is still underneath its important $3 per pound resistance level, which creates a downside bias for the metal unless it can negate the bearish signal by decisively breaking back above this level. Copper’s recent rebound appears to have formed a channel pattern that may be helpful for determining its next immediate move. A breakdown from this channel could foreshadow a correction back to the January lows or even lower.
The longer-term chart shows how important the $3 per pound level is for copper. If copper’s bearish breakdown signal is not negated and the recent rebound channel is broken to the downside, it is conceivable that copper may fall to levels last seen in early-2009 during the Global Financial Crisis. It is worth noting, however, that commercial copper futures hedgers (often considered the “smart money”) have a sizable long position, though they have been paring it back as copper rebounded this month. One possible scenario is that copper will re-test its $3 resistance level or just below it, the commercial hedgers will cut back their long position even further, and then copper will begin the next leg of its descent.
Source: Finviz.com The U.S. dollar has a significant influence on commodities such as copper, so traders should watch it closely. The U.S. dollar trades inversely with commodities, so dollar strength is typically bearish for copper, and vice versa. As I discussed in another piece today, the U.S. Dollar Index has formed a possible pennant pattern that may indicate further gains ahead if Thursday’s bullish breakout is sustained. If the U.S. dollar rallies after its breakout, it could lead to further weakness in copper. If the dollar’s breakout fails and leads to a correction, on the other hand, copper may continue to rebound.
If you are interested in learning more about trading and profiting from the global currency market, I am teaching a free webinar on Friday, March 6th at 4:00 PM EST. In this webinar, I will be addressing the points made in this piece and will have a Q & A session where you can ask me questions about global financial markets, economic bubbles, and much more. Please click here to register for this free webinar.
(Disclaimer: All information is provided for educational purposes only and should not be relied on for making any investment decisions. These chart analysis blog posts are simply market “play by plays” and color commentaries, not hard predictions, as the author is an agnostic on short-term market movements.)