Back on Oct 22 we called the top in Copper.
Commercial traders were getting extremely short, with our 18m Relative Score on Net Positioning below 10 multiple times. Historical Price distribution showed that odds were in favor of bears given this condition.
Now, 6 weeks later, as this downtrend continues to develop, we are seeing similar activity.
Technicals confirmed, with a massive volume Shooting star "ringing the bell" to the change in trend. Since then, we have seen further price deterioration with extremely bearish weekly candles being accompanied by heavy volume.
Now, this week, we again see a "Bearish Cloud Cover" Candle on heavy volume, signaling the ongoing weakness. Our price oscillator is confirming the bearish move.
Looking at this weeks COT report, not only is the Commercial Net Position below 10 again, but rather interestingly, they continued to short during the prior week's 6 cent decline, selling another 5k contracts and taking their net position to a very Bearish (50.9)k contracts.
Since 2006, 80th Percentile Price distribution over a 20 Trading day interval, sees price advance by 4.65cents and decline by 4.15cents for Bull:Bear odds of a shade over 1:1 - Pretty much a coin flip bet.
However, when commercial Trader 18m Net Position scores less than 10, we see this change to 2.48cents up by 6.8cents down for odds of 1: 2.75 in Bears favor now. The 70th percentile movements, while not as bearish, still show a negative dispersion with 1:1.3 odds in Bears favor.
The final piece to the puzzle here may be seen by looking at the recent action on the Shanghai futures exchange where we see numerous base metals exhibiting price weakness with the 4/9/23 channels all turning negative, or at minimum neutral from down.
Aluminum, Copper, Bitumen, Zinc, Nickel, Tin, Lead - They are all rolling over.
There is evidence of deleveraging in China over the past few weeks with Bonds & Equities joining the base metals route. While US equity players and Vol sellers wont let anything get in the way of their Santa Claus rally, it is difficult to see Comex Copper ignoring it.
After a 60+% 1 year rally from Oct 16 thru Oct 17, Copper topped in late October. Bearish Tape action, a China Base metals selloff, along with heavy Commercial selling are telling us that there is likely further weakness ahead of us.
Here is how to play it.
Go Short 1 Mar18 HG Future @ 3.095.
Buy a 3.10 by 3.25 March Call Spread which will Cost approx 6cents.
Sell the March 2.90 covered Put, collecting 4.2 cents.
Your risk here is roughly 2.5cents with potential upside of 19 cents for 7-1 R/R provided Copper doesn't go above 3.25. We have 82days for this trade to work.
If we are wrong and prices reverse higher, cover your short 3.25 call on any daily close over 3.20. As the Delta on this option is .29 you can anticipate a loss of 3 cents on the call in this scenario - Your R/R at trade expiry would still be an acceptable 2-1.
Good Trading to all.