Short Term / Sell
Head of Commodity Strategy
Summary: High grade copper was a star performer this past month on the back of tightening supply and optimism on several Chinese fronts. However, this could be an opportune time to hit the pause button.
Instrument: HGK9 or COPPERUSMAY19
Price Target: $2.820/lb
Market Price: $2.960/lb
While we maintain an overall constructive view on copper due to tightening supply more than increased demand, we also see signs of a market in need of a correction. The RSI has moved into overbought territory and with a lot of good news on trade now being discounted the risk of a disappointment has risen. Either from the trade talks or from weaker than expected macroeconomic data from the world’s three biggest copper consuming regions.
Supporting the rally has been a recent decline in copper stocks held at London Metal Exchange-monitored warehouses. While this has created a sense of tight supply, we have simultaneously seen a strong increase in deliverable stocks at the Shanghai Futures Exchange.
The US government shutdown between December and January resulted in a delay in the reporting of speculative positions held by hedge funds. While the CFTC is expected to have cleared the backlog and be “live” again from March 5, the latest available data covers the week to February 12. It shows that hedge funds during a four-week period from January 15 had cut a near record short to almost neutral. Buying is expected to have continued since then with funds now holding a net-long.
Entry: Sell at current price around $2.965
Stop: $3.025/lb (1.5 ATR)
Target: $2.82/lb (3.6 ATR)
Time Horizon: 1 – 2 weeks.
With the trade parameters laid out we do not plan to update this trade recommendation on a regularly basis.