Copper bounces back … for now

The price of copper has bounced back after suffering heavy losses in recent days which saw it drop for a time to its lowest level since May 2009. Not that US data had any material impact previously, but the upward revision to the third quarter GDP estimate has been cited as the reason for today’s bounce in copper and other commodities. In truth, the US numbers were far from strong, with CB’s consumer confidence barometer, for example, plunging almost 9 whole points to 90.4 while the Richmond Manufacturing Index tumbled to -3. And although the GDP was as mentioned revised higher, to 2.1% from 1.5%, the personal consumption part of the report was actually revised lower to 3.0% from 3.2% initially thought. As a result, the dollar has weakened slightly, which may be among the reasons some dollar-denominated commodities have found support today. The absence of fresh news out of China is another reason why the metal has rebounded as after all “Chinese concerns” were among the main reasons behind the slump in base metal prices. But like many other commodities, copper’s outlook remains bleak as there’s too much supply of the metal above ground which prevents it from staging a sustainable recovery. That being said of course, there is so much that prices could fall, and with miners such as Glencore rushing to scale back production, the copper market should begin to tighten and price falls to at least slowdown in 2016.

As we reported the possibility a couple of weeks ago (see “Dr Copper: global economy getting ill,” for details) the price of US High Grade Copper future has reached the psychologically-important level of $2.00 where it has found some support now. As a reminder, we pointed to the fact that the last notable rally off the $2.20 handle had seen price only manage to recover up to the 38.2% retracement level of the previous downswing. This shallow retracement correctly suggested that further sharp – rather than shallow – falls were on the way. Indeed, that’s exactly what has happened, with price extending to the 161.8% extension of the BC swing and our main target of around $2.00 after breaking a major support at $2.20. It has now bounced off this level due first and foremost to profit-taking, especially since prices had been severely oversold – as highlighted by the Relative Strength Index (RSI) moving below 30. Undoubtedly, there has been some opportunistic buying activity too here, helping to accelerate the bounce. But essentially, it is an oversold bounce in a downward-trending market. As such, I am wary of calling it a bottom. If the current harmonic price pattern continues, copper may well eventually extend its decline to point D of the AB=CD pattern. This incidentally comes in around the 261.8% Fibonacci extension level of the BC swing at $1.73. Textbook stuff.

But there is the possibility that we will first see higher levels in the coming days if this short-covering rally continues. This may well be the case, due, for example, to the lack of Chinese data this week. But should it get there, the previous support range between $2.20 to $2.22 could turn into resistance and lead to another potential sell-off. At this stage, a decisive closing break above $2.22 is needed in order to signal a change in trend. Until such a time we see that, the path of least resistance remains to the downside.

Figure 1: