Copper Technicals – Trading above 3.30 but within 3.25/3.38 Band

Daily Chart

Since breaking the 3.25 significant resistance and confluence with rising Channel Top, prices have not really continued higher quickly but appears to be pivoting around 3.30. This usually would raise concerns about the sustainability of such a breakout, especially given the slowdown of high manufacturing countries economy such as China and India.

However, looking from a pure price action point of view, we can see that there is precedence for such price action before. Taking a look at price action after 4th May, we can see uncanny resemblance between then and now. Prices also stammered around 3.30 before eventually breaking up and hitting 3.38. Between May and early June, price dithered from 3.25 – 3.38, before heading back lower once again due to Fed’s tapering concerns.

The scenario is fairly similar this time round. Prices have pushed up recently due to stronger than expected US ISM Manufacturing numbers, while Germany’s recent data showed that the country has somehow managed to turn the corner. Even China enjoyed a stronger than expected growth in Industrial Output, helping copper and other industrial metals gain in prices. Given such improvements, it is possible that short-term “feel-good” factors may drive Copper higher, hence a move towards 3.38 cannot be totally ruled out.

Beyond 3.38 is a whole different story though, as fundamentally nothing much has changed between China and Germany, and to a larger extend Europe as a whole. Even if we assumed that Europe recovered fully, it is unlikely that the increase demand of copper from the whole of Europe will be able to make up for the decline in China, which accounts for almost 8 million metric tonne of refined copper consumption in 2011. Europe only accounted for 3.5 – 4.0 million metric tonne just before the financial crisis, and has been consuming just under 3 million tonnes of copper in recent years. Hence a full recovery of Europe could only add a maximum of 1 million tonnes in demand, while the slowdown in China has much larger potential damage, considering that China’s consumption level was only at 5 million tonnes annually prior to recent boom (source: ICSG).

Furthermore, the issue of Fed Tapering still remains, and the question has already been changed from an “If Fed taper” to a “When Fed Taper” one. Even though some may say that the act of tapering may encourage corporations to start spending more money as a sign of US stepping out of the recession shadow, it is unlikely that short-term reaction towards any removal of stimulus would be bullish. As such, the move back below 3.38 appears to be a more realistic one.

From a pure technical perspective, Stochastic readings are also heavily Overbought, which adds credence to the pullback scenario, potentially bringing us back to 3.25 just like before. It is possible that price may continue to stay within the 3.25 – 3.38 band for an extended period of time especially since QE tapering impact/effect/ and the resultant market sentiment is up in the air. As such, longer-term trend traders may find it more prudent to wait for a break of 3.38, preferably with a clearer sign that the global economy is recovering on top of Fed already made their QE taper cut. If price is able to break 3.38 even after Fed has initiated the cut, the subsequent rally will appear to be more sustainable moving forward.

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