While copper has seen a rally of approx. 15% off its 2016 low, it’s still in a down trend and a trend that currently appears to be ready to continue lower based on the current price action, momentum, seasonality, and money flow. I’ll dig into each of these topics in the paragraphs below to show why we may start seeing lower copper prices in the coming weeks/months.
Price Action
First lets look at the weekly price chart for copper ($HG_F). We can clearly see that copper has been in a multi-year down trend, partially defined by the 50-week Moving Average which has acted as a level of resistance on counter-trend rallies. Copper broke above its 50-week MA for a couple of weeks in July but has since returned back under the moving average. I’ve drawn a symmetrical triangle around price action for 2016 to show levels of resistance and support. A break of the lower highs or the higher low would be key in defining the next leg of price action.
However, the range that momentum (as measured by the Relative Strength Index (RSI) in the bottom panel) appears to still be in a bearish range. The RSI has stalled on counter-trend rallies around the 60 area, which is where it’s near right now. From a price and momentum perspective, copper has some work to do in order for the bulls to keep the current short-term advance going.
Money Flow
Next up we have the Commitment of Traders (COT) data. The red line in the bottom panel of the chart below shows the net position of Commercial Traders (often dubbed the ‘smart money’). Typically Commercial Traders remain net-long copper, but when they do shift to a net-short position, copper prices have begun to struggle as noted by the black circles around previous instances. We are seeing similar sentiment right now as the Commercials have moved back to a net-short position over the last couple of weeks. If history is our guide, this doesn’t bode well for copper.
SeasFinally, we have seasonality, with this chart from SentimenTrader. Like many markets, especially commodities, copper traders in a nice seasonal pattern. You’ll notice that price has typically topped out around August with the average monthly performance for September and October being negative.
So we have price sitting under resistance with momentum also tucked under its previous levels of resistance. The ‘smart money’ has shifted to a net-short position and seasonal winds have changed direction and now are creating headwinds for copper. With price, momentum, money flow, and seasonality all showing a bearish slant for copper it’s hard to make an argument for copper prices to materially continue to rise from here.
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