The presence of flat 200 day moving averages throughout many of the US Stock Market Indices and sectors, combined with a few other factors, is causing me to maintain a neutral / bearish stance toward equities for the time being.
Fortunately, as a technician I can take advantage of opportunities in other non-correlated liquid asset classes when I’d prefer to avoid equity exposure on the long side. Today, I’ll turn our attention to a beaten down commodity with potential for a countertrend rally – Copper.
Copper looks good on the long side for a number of reasons. And a copper rally could just be getting started.
- Copper has no correlation to the S&P 500, which is great given my view on equities at the moment.
- Commercial hedgers are net long and getting longer, with their position slowly creeping its way back toward all-time highs.
- In terms of public sentiment, pessimism is near levels only registered a few times over the past few years, levels not exceeded since late 2001.
- Seasonality is pretty neutral into year end. While not a major tailwind, it’s good to be aware that history would suggest it shouldn’t be a headwind for higher prices going forward. If Copper prices do manage to gain traction though, it’s important to notice that Jan-April is the best 4 month period of the year for Copper.
- While still broken structurally, Copper has met my downside price target from a tactical perspective, thus opening the door for the possibility of a mean reversion / counter-trend trade and a Copper rally.
Overall, this backdrop for Copper prices looks like it has the potential to support a countertrend Copper rally. But let’s take a look at what prices are indicating.
From a structural perspective, Copper has been in a downtrend for years, but prices really began accelerating lower once long term support near 3.00 was broken last year. My structural downside price target for Copper is near the ’09 lows at the 161.8% extension of the 2010-2011 rally, but prices have recently gotten really extended from the major downtrend lines that have helped define this decline. Additionally, momentum has diverged positively at these recent lows as prices have stabilized for a few weeks, suggesting that Copper prices may retrace from here.
The Bottom Line: With sentiment as pessimistic as it is and price action improving, it may be time to look at Copper on the long side. The weight of evidence suggests that further strength in this market can be expected, but more cautious traders can wait for a breakout above the recent highs of 2.13 on a closing basis before getting involved on the long side.
Should a Copper rally continue to develop, longs can use price targets of 2.22, 2.32, and 2.42, which are outlined on the daily chart as points of reference.
Overall I’m looking for Copper prices to retest its 200 day moving average near target 3, which is roughly 15% above current prices. Assuming a stop below 2.08 and utilizing 2.42 as a primary objective, the risk/reward for this trade is roughly 10:1 from current levels. That’s good enough for me.