Derivatives

Rally in copper gathers momentum

Gurumurthy K | Updated on January 20, 2018

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The reversal from long-term support signals the possibility of a bottom in metal prices

Copper prices have made a smart recovery after falling to a six-year low in January. The metal began this year on a negative note as its futures contract fell to $1.93 per pound in January — its six year low on the COMEX (Commodity Exchange, Inc). The fear of a further fall has eased after the 18 per cent recovery from this low.

Two factors are major drivers of this rally. One is the recent good economic data releases from the US, which are providing hope that the global economy could be recovering. Second is the expectation for more stimulus measures by China. In order to boost liquidity China reduced its bank reserve ratio by 50 basis points last week. This move, combined with the strong job numbers from the US on Friday, boosted copper prices last week. The metal’s futures contract on the COMEX rose to a four-month high of $2.3 (after the US jobs data), before closing at $2.27 on Friday, up 7 per cent for the week.

On the domestic front, the copper futures contract on the Multi Commodity Exchange surged 5.4 per cent last week to close at ₹339.2 per kg. This contract moves in tandem with the COMEX contract. The sharp rise in the global prices has completely overshadowed the impact of the strong rupee.

Global sentiment is clearly changing. Good economic data coming out of the US suggests lower probability of the Federal Reserve increasing rates further. Instead, it is boosting hopes that the global economy could be recovering. So, data releases from the US, especially on housing, will need a close watch as they would influence copper prices. The US housing sector is one of the major users of copper.

Demand-supply imbalance

The International Copper Study Group (ICSG) last year had forecast the copper market to run into deficit in 2016. It has estimated refined copper production to increase by 2 per cent this year from 2015 to 23.18 million tonnes. The usage was estimated to increase by 3 per cent to 23.31 million tonnes in 2016, thereby ending the year with a deficit of 0.13 million tonnes. The ICSG is scheduled to meet this week for its next forecast. ICSG releases its forecast twice a year, in March and in October. A higher revision this week in the deficit target for 2016 could boost copper prices further. The metal could witness a corrective fall if the deficit target is lowered or a surplus is forecast.

Has the price bottomed?

There has been talk in the market that copper prices could have bottomed after the recent rally. On the charts, there are signs of a trend reversal. Additionally the sharp bounce from the six year low has happened from a very important long-term support which is strengthening the case for the price to have bottomed.

The downtrend that has been in place in the COMEX copper contract from May 2015 high of $2.96 halted at a low of $1.93 in January. This low coincides with a long-term up-trend line support. Also, the price action since mid-November suggests the formation of an inverse head and shoulder reversal pattern. This is a bullish pattern. The 7 per cent rally last week has broken the neckline resistance of this pattern at $2.13. This adds further strength to the case of the price having bottomed and the trend being reversed. The target of this pattern is $2.33 which is can be tested in the coming weeks. The 200-month moving average and also the 38.2 per cent Fibonacci retracement resistances are also at $2.33.

So the chances of a corrective fall to $2.2 or $2.15 from there cannot be ruled out. However, if the contract manages to break above $2.33 decisively, then the rally can extend to $2.4 or $2.5 thereafter. The outlook will turn negative only if the contract falls below $2.12. It will then increase the threat of the price falling back to $2 levels.

On the domestic front, there is a double-bottom reversal pattern on the MCX copper contract, signalling a trend reversal and a bottom. Strong support lies between ₹320 and ₹316. A rise to test the next resistance at ₹347 is likely in the coming weeks. A strong break above ₹347 can take it further higher to ₹355. The contract will come under pressure only if it declines below the 21-week moving average support near ₹316. Such a break will increase the danger of the contract revisiting ₹300 levels.

Published on March 06, 2016

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