The last 3 weeks has seen COMEX Copper market trend higher. The drive higher has been largely lead by the return of risk appetite in the markets and a broad based sell-off of the USD.

Thoughts from the trading floor

The technical outlook for the market has become somewhat neutral with a slight short-term bullish bias. The market has continued to show some immediate term strength and has now reached a critical resistance area around the $328.10-$330.00 mark. A firm break above here would be the catalyst for an extended run higher to the $350.00 handle. The market formed a stabilising base around the 287.00-292.00 area and a break of this supporting base followed by a firm close below the $280.00 handle would be the required for another firm leg lower, providing bears with an ideal opportunity to take a position ahead of the yearly lows at $274.00. A break below here should push the market into a medium term bearish trend.

Quite noticeably, the copper market has remained resilient to the volatility in risk markets since May. The market is well known as being the leader of macro-fundamental trends. The continued short-term strength of the market would therefore suggest that risk has somewhat bottomed out in the short-term. However, with it being so close to a key short to medium term resistance area, a turn lower may serve to catalyse a broad based sell-off in risk assets across the board and thus provide further impetus to a move lower. The USD has also reached a key short to medium term support level and thus, as we saw from the turn off the recent lows in the copper, a renewal of the medium term uptrend in the USD should also coincide with a turn in the copper.

Interestingly we have also seen the recent trend of the USD underperforming low yielding currencies vs. the high yielding currencies confirmed as a new market flow. This would suggest that perhaps the move lower against the low yielders is a fairly temporary phenomenon as participants remain quite cautious in assuming risk and the moves in the low yielders is a bout of capitulation of long USD positions. This would support the idea that a quick turn-around of the USD would have a strong negative effect on the industrial metals markets.

Bull View

The bulls will be hoping that the short-term resilience shown over the last 2/3 weeks can continue and a continued affinity for risk trades across other risk asset classes will be enough to see the market steadily grind higher. They will cite that the short-term technical picture favours their view and look for a break and close above the $328.10-330.00 level to cement a medium term upward trend.

Bear View

The bears will see the market around a potential turning point. A confirmation of a turn-around in the Copper and USD may be required if bears are looking to re-establish control of the market.

Futex View

We have turned short-term bearish this week. With both the USD and copper around key medium term levels, we see a potential for a high impact short-position in the copper with a relatively tight stop above the $330.00 handle.

The last 2 weeks have seen the COMEX Copper market recover from its 2010 lows. This has been in spite of the recent volatility in risk trades across the board and the continued negative sentiment in Chinese markets.

Thoughts from the trading floor

The technical outlook for the market has become somewhat neutral with a slight short-term bearish bias. The market has continued to show some immediate term strength above the $285.25 to $291.45 base, although the market’s inability to drive significantly away from this base keeps it under pressure in the short-term. A daily up-ward trend at ($291.35 today) is also helping the market to maintain a base. A break of this trend-line followed by a firm close below the 285.25 support area should be the catalyst for another leg lower in the market, providing bears with an ideal opportunity to take a position ahead of the yearly lows at $272.00. A break below here should push the market into a medium term bearish trend. Interestingly, bulls will be encouraged by a potential inverse head and shoulders pattern on the daily time frame. If the market can take out the short-term down-trend line at $306.25, a bullish signal targeting the $340.00 mark will be triggered. Along the way, the market must take out the firm resistance level at $326.75. This inverse head and shoulders in the Copper market would also coincide with one currently forming in the Euro/USD. Thus the catalyst for the drive higher may be a sharp downtrend in the USD.

Quite noticeably, the copper market has been weighed on this last quarter by the weakness in Chinese markets. Fears of over-capacity combined with a sudden contraction of cheap liquidity have hurt Chinese markets over recent weeks. However the last 2/3 weeks has seen the Copper market not reflect the continued strains in those markets. This would suggest that there is a big short-term move imminent in the Copper market as it is clearly being pulled by two strong contrarian forces. The fact that it is lagging the weakness in risk markets tends to suggest an accumulation of long positions and thus a strong ‘snap’ down in other risky asset classes combined with the above discussed technical setup may drive the market sharply lower. On the other hand, the market has shown some resilience to the recent bout of weakness in risk and thus a small abatement of this bearish pressure should see the market gradually drift higher as it looks to build up momentum. This type of price action would favour short positions over the next week looking for the high impact sell-off. As the market will not run-away from the shorts if it rallies, there should be time to cut and reverse positions if the high impact trade doesn’t work out.

Bull View

The bulls will be hoping that the short-term resilience shown over the last 2/3 weeks can continue and a small abatement in risk aversion trades across other risk asset classes will be enough to see the market steadily grind higher.

Bear View

The bears will see the current ongoing trend in risk aversion as an ideal opportunity to enter shorts. They will see the market being close to turning medium term bearish, and that there will be a high impact trading opportunity in the next 2 weeks.

Futex View

We continue to back the bears. With the potential for a high impact short position in the immediate term, we would favour a short-position with a relatively tight stop. However we are willing to reverse the position and go long if the market breaks the daily down-trend at $306.26.

The last week saw the market push lower on concerns that the Eurozone issues will spread causing the global economic recovery to stall. The market has also tracked the Chinese Shanghai Composite, which has stalled in its advance, and is trading back below the 2900 handle, keeping the copper from bouncing back in-line with the US equity indices.

Thoughts from the trading floor

The technical outlook for the market has turned short-term neutral, with an immediate- term bearish bias. The move through the $345.20 level on Tuesday has seen the market stall around the next major support area between the $329.00 and $332.15 levels. Further weakness should see the market trade down to the $315.60-$317.10 major support area. A firm break below here could set the market on course for a sharp, short-term corrective down trend. Otherwise, if the immediate term bearish pressure can dissipate, a bounce from the $332.15 level sees the market recover back to the $345.20 level. At this point, the market would have formed a potential head and shoulders reversal pattern on the daily chart. Thus a firm break higher to the $355.25 level will be required to prevent a sharp deterioration of the medium-term bullish outlook.

The last 2 weeks has seen some major currency commodities stall in their incessant advance higher. The Aussie Dollar, the most closely linked currency to commodities and closely tied to China, has come back below the important 0.9330-60 area. This has also served to cap the rise in the industrial metals. However the market has managed to recover from the lows seen earlier this week from around the 0.9100 handle.

Quite noticeably, the copper market has been weighed on this week by the Chinese Shanghai composite. Fears of rate tightening by the Chinese PBOC combined with the immediate term negative sentiment from Europe has seen the market stall sharply in its advance higher. The Shanghai composite is trading below the 2900 handle and is approaching key support areas around the 2700 handle. A move below here may serve to panic Asian markets and thus hit the copper, which is very tightly linked to Chinese demand. In fact a firm break below 2700 would put the Shanghai Comp. into “bear market” territory (20% off its highs).

Bull View

The bulls will be hoping that this over-optimism (or ‘bubble’) can continue. For this to happen, Chinese markets must remain strong and the USD must weaken against the major commodity currencies. They hope that neither the Chinese nor the Fed remove excess liquidity support from the markets. Bulls will hope that Chinese equity markets can stage a big comeback.

Bear View

The bears will see the current trend in commodity markets as over-exuberance. The uncertainties surrounding the precarious fiscal uncertainties of some major global economies and the threat of imminent liquidity removal will keep bears interested in the medium term. Also, the strong trend higher in major commodities of late may lead to a similar situation as we saw in the summer of 2008, when high commodity prices hurt a fragile global economy which was battling the credit crunch. A move to below 2700 in the Shanghai Composite may panic markets into believing that the Chinese “bubble” has started to burst causing a sharp revaluation of prices in industrial commodities.

Futex View

We continue to back the bursting of the bubble hypothesis. Globally, markets seem to be going through this positive feedback loop created by cheap liquidity. We continue to look for further weakness in industrial commodities, as they seem fundamentally over-valued, especially in-light of the speculative drive-up we saw in commodities on the back of USD carry trade.

The last week saw the market edge lower to test major support around the $346.65 level. The gradual move lower over recent days has been primarily lead by a firming up of the USD which has weighed on other major commodity markets also.

Thoughts from the trading floor

The technical outlook for the market favours the bulls currently. Despite moving lower, initially on the back of macro-economic news flows, the market has stabilised above the $346.65 level. Technical oscillators now point the market being oversold on the daily charts. This has enabled medium term longs in the market to hold their positions as the correction from overbought conditions has not broken through the significant levels to force them out. Bulls will look for a bounce back through the 355.00 level in order to reassert immediate term bullish momentum. This should then see the market retest recent high prints at the 368.00 level. Bears will be looking to force a move below the 346.56. This should serve to shake out fresh buyers form the market. Although major daily support around the 329.00-332.15 area should provide significant support and will need to be breached in order to change the short-term outlook for the market to bearish.

The recent days has seen some major currency commodities stall in their incessant advance higher. The Aussie Dollar, the most closely linked currency to commodities closely tied with China, has held major weekly resistance around the 0.9400 handle. This has also served to cap the rise in the industrial metals. Any deterioration of the currency may serve to keep the copper market under-pressure, which could aid bears in forcing out weak recent longs.

The one major factor which has held back the industrial commodities from rising sharply, in line with other risk trades, over the last 2 weeks has been the continued chatter over further monetary tightening by the Chinese authorities. Talk of an upward revaluation of the Chinese Renminbi remains the major underlying fear of markets closely linked with Chinese consumption. With the Chinese GDP and inflation numbers suggesting that recent curbs in loan growth by Chinese authorities has failed to make a significant impression, chatter over an imminent revaluation have held back the Copper markets as well as Chinese stocks. However, if we do not get any tightening of policy in the next 2-3 weeks, we may see the market “climb a wall of worry” and rise regardless. This is backed up by the technical outlook for the market.

Bull View

The bulls will be hoping that this over-optimism (or ‘bubble’) can continue. For this to happen, Chinese markets must remain strong and the USD must weaken against the major commodity currencies. They hope that neither the Chinese nor the Fed remove excess liquidity support from the markets.

Bear View

The bears will see the current trend in commodity markets as over exuberance. The uncertainties surrounding the precarious fiscal uncertainties of some major global economies and the threat of imminent liquidity removal will keep bears interested in the medium term. Also the strong trend higher in major commodities of late may lead to a similar situation as we saw in the Summer of 2008, where high commodity prices hurt a fragile global economy battling the credit crunch. The issues surrounding the Euro-Zone peripherals can only get worse, even if Greece gets its entire bailout money. Bears will see these fiscal issues hurting Global recovery, eventually causing a double dip.

Futex View

We continue to back the bursting of the bubble hypothesis. Globally markets seem to be going through this positive feedback loop created with cheap liquidity. We continue to look for further weakness in industrial commodities, as they seem fundamentally over-valued, especially in-light of the speculative drive up we saw in commodities on the back of USD carry trade.

Commodity Overview

Focus on COMEX Copper futures (Dec’09)

 Yesterday copper broke out to the up-side of its recent range. The market had spent the last 8 weeks trading between $290.00 and $270.00 on the Dec’09 contract. Continued USD weakness has spurred further risk appetite helping the market break through previous YTD highs at 298.85.

Thoughts from the trading floor

 The technical outlook for the market suggests a strong bullish skew. Prices in the market have more than doubled since making the lows in 2008, in line with most commodity markets globally. Since August, the market had settled into a tight range making a double bottom low at $266.00 and a double top around the $299.00 handle. A break out above $299.00 suggests further upside for the market. Significant resistance lies at $323.85 and then $354.98. On the downside, major support lies at $266.00. A break below here would signal further down-side to at least $245.85 and then $213.45.

Copper, as with other commodity markets, has a very strong negative correlation with the USD. As the USD continues to make fresh YTD lows, we would expect the copper to continue its up-trend. This may now accelerate as it has broken through significant resistance levels. Also, industrial metals have been rallying as speculation of a stellar economic recovery in China spurs participants to keep buying industrial metals despite the excess short-term supply in the market. This has convinced some participants to believe that the commodities are in a “bubble” state. This may also be seen in commodity markets, credit markets and corporate bond markets. The principle driver of this risk rally has been the carry trade against the USD into high yielding currencies. Also, as most of the high yielders are commodity producers which do well when commodity prices rally, we are seeing a continuous positive feedback loop. This is a hallmark of a market being in a “bubble” state. Until the last 2 weeks the copper market, with its huge excess short-term supply, had resisted this recent leg higher in equities and energy commodities. However recent short-term disruptions in supply due to a strike in a major Chilean copper mine and an Australian copper mine has finally forced the market to surge higher.

Bull view

The bulls will be hoping that this over-optimism (or “bubble”) can continue. For this to happen, Chinese markets must remain strong and the USD must continue to weaken. They, therefore, hope that neither the Chinese nor the Fed remove excess liquidity support from the markets. If conditions stay as they are now, the commodity markets may continue spiralling up-wards as we did last year during the commodity bubble. The positive feedback loop in current financial markets seems almost unstoppable at the moment.

Bear view

The bears will see the current trend of USD weakness resulting in higher equity and commodity prices as a new bubble waiting to burst. As with most bubbles it only takes a small shock to break the feedback loop which is supporting the market. Therefore, they will continue to look out for any shocks emanating from China or the Fed.

Futex view

We continue to back the bubble hypothesis. Globally markets seem to be going through this positive feedback loop create with cheap liquidity. It seems difficult at the moment to pick the top of the market, but will look to be aggressive on shorts if we can see the market make a significant break back below $299.00 or external conditions such as a shock in Chinese markets occur.