Copper Breaks Out

Commodities Bottoming

On January 28th in our “Copper-Bottom” report we said “copper should continue a modest rally near term from the $1.90’s to perhaps the $2.20’s”. In the chart below you can view an upward biased trading range since that report as Copper broke sharply higher this week into the $2.20’s. That would be a $2,500 per contract gain since 1-28-16.

Copper 3-16

One important element for the short term up move was the extempore sentiment we noted in January where key downside targets were reached and Money Managers and Large Speculators would need to cover their historically large net short positions/hedges. In January we said to expect a move into April/May. Given the speed with which we reached our first target in the $2.20’s we suspect that after a pullback we have time to continue the advance above $2.40 until the Managed Money positions rise above the current neutral readings toward mildly overbought.

 

Positive News Response Syndrome

Most commodities have been rallying in recent weeks despite negative economic news from around the globe. Service and Manufacturing surveys show sharp deterioration in the US and China, yet Gold, Copper and even Oil have been moving higher. The seasonal low in the energy market we have been forecasting for a few months to end in February certainly appears to have arrived and provided support to other hard asset markets as well as stocks. While 1st quarter GDP forecasts have been falling as the quarter progresses, we may be ready for a cessation in economic deterioration over the next few months. While not surprising to see Copper reach our near term up side targets, we are further encouraged by the strength during a period of pronounced fundamental weakness during a negative news reporting cycle.

The long term picture into 2017 for Copper is more sanguine as global capacity is in surplus and the cost of production allows for lower prices in an environment where secular declines in usage, led by China, should persist. Look for a continued rally short to medium term, but gains should be limited into 2017. When Leading Economic Indicators and the energy burdened earnings cycles confirm new highs, then the longer term picture for Copper will improve significantly.

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