There's always an obvious "ha ha stoopid" risk in this kind of call, but there's every reason to suppose a bottom in copper (and by extrapolation from "Dr. Copper" the whole base metals complex) right here. Evidence comes from Freeport McMoRan (FCX) (my and many other people's idea of a leading copper stock indicator), from spot copper and from the US dollar.
First FCX, and this is a chart someone sent me Friday evening. It's so good that I asked and received permission to use it here (thank you JG):
First FCX, and this is a chart someone sent me Friday evening. It's so good that I asked and received permission to use it here (thank you JG):
Freeport McMoran (FCX). Click to EnlargeIt's really self-evident, and takes the passing comment I made Friday afternoon pre-bell and turns it into a compelling argument for "long FCX now". Note how the large 'capitulation volumes' line up neatly with ST bottoms in FCX, and how U$70 is a screamingly obvious support zone.
Next, spot copper. This is a updated version of the chart I put up on Friday, but it's worth reprinting not least for the fact that interestingly (for me at least) in the last three days it's become the most clicked-upon chart ever at the blog.
click to enlargeThat simple chart can also be backed up by this simple chart, showing LME warehouse stocks for copper over the same five year period.
click to enlargeI make the "fooled by randomness" comment because I am not a fan of technical analysis myself. However, there comes a point when even a arch-critic can look at a chart and say "yep, it'd be stupid to ignore that one", and that's what we're facing right now, I'd venture. To sum up:
- FCX, the leading indicator copper stock, showing a oversold pattern that is nearly identical to the last two oversold-then-rebound situations.
- Spot copper at the resistance point in its long term trend.
- LME warehouse copper stocks also at a likely reversal point.
So how does this correlate with real world events? Is there good reason to suppose a rebound in spot copper from here? Well for a start, a lot of the weakness in commodity prices has been due to the recent strength in their marker currency, the US dollar. Here we see how the USD index has performed recently, and I'll stick by my comment scribbled on the chart.
USD index. Click to enlargeTo reiterate, those who know me know I'm not a TA lover, but this time further strength in the USD would allow me to ignore the pseudoscience forever and ever amen as any chartist would be hard put to say anything bar "greenback's overbot, dude" on looking at this graphic.
The dollar's strength is largely due to the recent buying activity in US treasuries bonds; the so-called 'flight to quality' (be that misnomer or not) that has been helped on its way by direct buying by Chinese money (see Brad Setser's blog for more details). Although not using it as hard evidence, right now I'd tentatively point to the gov't takeover of Fannie & Freddie as a reason for more investor confidence, which would mean a reversal of money flow from fixed income and into equities. Looking at the longer-term, a strong dollar is not good for a US economy in pre-recovery phase; the USA will need the competitive edge it gains from a weaker dollar to compete on the world market and reverse (at least some of) its heavy trade deficit.
Then there is the question of demand for copper and other commodities. I'd also point to China's clearly planned and announced post-Olympics production rebound as another "duck coming into line." In its last major politburo meeting just before the Olympics, China's decisionmakers decided to move away from inflation-fighting policies and back to "steady and fast economic growth". This is a major policy move that is likely to result in higher demand for copper and its friends in the next few months. But whatever happens in the short term, in the longer term, demand isn't suddenly going away for copper (and other commods).
Finally, there's the question of supply. The recent credit crunch has stopped a lot of mining projects in their tracks (as anyone with portfolio exposure to junior miners will quickly tell you). The delay to mine construction now means, Q.E.D., a delay in previously predicted supply coming online in the future. Current forecasts of 9 to 12 month delays in supply delivery from new mines is in my humble opinion rather optimistic. If the market doesn't loosen up in the very near future, I think we'll be counting that supply lag in years, not months. All the time that China will be presumably moving forward with its ambitious 9% GDP (or so) growth program. Under such circumstances, economics 101 will tell you that either supply increases or price increases.
The last few points are longer-term considerations, of course. Frankly, it's where I feel most comfortable as an investor and analyst. However, the previous charts featuring FCX and copper point to things coming to a head in the very near future, and I for one will be betting that copper and FCX bounce from here. But be clear; if the strong resistance outlined in this article were to fail, I will not be hanging around to see what happens next. All money will come off the table very quickly.
All this is in my own opinion. Do your own due diligence, dude. It's your money and your responsibility.
The dollar's strength is largely due to the recent buying activity in US treasuries bonds; the so-called 'flight to quality' (be that misnomer or not) that has been helped on its way by direct buying by Chinese money (see Brad Setser's blog for more details). Although not using it as hard evidence, right now I'd tentatively point to the gov't takeover of Fannie & Freddie as a reason for more investor confidence, which would mean a reversal of money flow from fixed income and into equities. Looking at the longer-term, a strong dollar is not good for a US economy in pre-recovery phase; the USA will need the competitive edge it gains from a weaker dollar to compete on the world market and reverse (at least some of) its heavy trade deficit.
Then there is the question of demand for copper and other commodities. I'd also point to China's clearly planned and announced post-Olympics production rebound as another "duck coming into line." In its last major politburo meeting just before the Olympics, China's decisionmakers decided to move away from inflation-fighting policies and back to "steady and fast economic growth". This is a major policy move that is likely to result in higher demand for copper and its friends in the next few months. But whatever happens in the short term, in the longer term, demand isn't suddenly going away for copper (and other commods).
Finally, there's the question of supply. The recent credit crunch has stopped a lot of mining projects in their tracks (as anyone with portfolio exposure to junior miners will quickly tell you). The delay to mine construction now means, Q.E.D., a delay in previously predicted supply coming online in the future. Current forecasts of 9 to 12 month delays in supply delivery from new mines is in my humble opinion rather optimistic. If the market doesn't loosen up in the very near future, I think we'll be counting that supply lag in years, not months. All the time that China will be presumably moving forward with its ambitious 9% GDP (or so) growth program. Under such circumstances, economics 101 will tell you that either supply increases or price increases.
The last few points are longer-term considerations, of course. Frankly, it's where I feel most comfortable as an investor and analyst. However, the previous charts featuring FCX and copper point to things coming to a head in the very near future, and I for one will be betting that copper and FCX bounce from here. But be clear; if the strong resistance outlined in this article were to fail, I will not be hanging around to see what happens next. All money will come off the table very quickly.
All this is in my own opinion. Do your own due diligence, dude. It's your money and your responsibility.