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 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.