Copper – Bearish Breakout on lower demands

Copper broke below $3.20 psychological level earlier, signalling potential more bearish actions ahead with current bearish breakout. Copper has been declining since Feb on global economic growth slowdown. Earlier this week, weaker than expected Chinese GDP and a downgrade of outlook by Moody’s propelled bears to sell Copper heavily, with prices already trading lower thanks to spillover of Gold’s dramatic slide. IMF’s downgrade of Euro-Zone’s 2013 and 2014 growth outlook yesterday certainly did bulls no favor. After $3.20 has been broken, price accelerated lower, before finding some support above $3.05, close to the Oct swing low back in 2011.

Daily Chart

From a technical perspective, we are seeing a divergence between Stoch troughs and price troughs. Successive stoch troughs since Feb has been trending higher but it is clear that price is pushing lower lows. This divergence suggest to us that more selling activities may be possible even though stochastic readings appear to be forming an interim trough above the 20.0 level. The same could be said of Stoch peaks, with the latest peak appear to be much higher than the ones formed back in Mar. Hindsight is 20/20, but signs were already pointing to a heavy sell-off back on April 14th – Retesting of Nov ’12 swing lows failed, rebound from Channel Top, Stoch peak divergence. Of course the bearish breakout could not be anticipated, but a retest of Channel bottom was the minimum bears were likely to achieve given all the bearish signals then.

Moving forward, what can traders do considering that a bear trend is already underway?

Hourly Chart

Similar to Gold, with such a strong bear trend underway, trading against trend will be considered highly risky. Nonetheless, there remains a chance of pullbacks especially after strong sell-offs such as this. With this in mind, traders may wish to look out for signs of exhaustion from bears, and gauge the underlying strength of bulls. If bulls have been confirmed to be weak despite diminishing bears, a potential return of current bear trend may be likely should bears recovers. From the hourly chart, we can see price potentially using current descending trendline as a rebounding platform for the bulls. Key levels to look out for would be 3.16 – 3.17 consolidation and 3.19 -3.2 previous swing low. Depending on bulls’ reaction at these levels, a rebound back towards 3.05 may occur, or perhaps continued correction above 3.2 may be possible as well.

Fundamentally, we know that demand for copper is weak. This is in-line with other metals and energy commodities, suggesting that it is a widespread economic issue rather than copper specific. The more interesting question we need to ask is this: Why are stocks pushing for higher highs when commodities are looking weaker than ever? Who is correct? Commodities or Equities? Reports are showing that more and more traders are buying call options on VIX, which suggest that sentiment expects the fear index to go up. Is this a reactive response after S&P 500 has fallen back to 1,450 levels, or is this the early onset of a larger correction? Well, we could be speculating here whole day being none the wiser, but traders should keep close watch on support lines between US equities and Copper. Now that Copper’s 3.2 line has been broken, should S&P 500 or Dow break their own significant support, we could see bears gaining initiative across board quickly.

More Links:
EUR/USD – Drops Sharply but Finds Support at 1.30
GBP/USD – Sinks as UK Unemployment Rate Edges Higher
AUD/USD – Falls to Five Week Low under 1.03

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.