Back in early June conditions were ripe for a selloff in copper, and now, helped by Trade War fears and the potential deflationary impact on economies and hence commodities, we have seen a complete reversal from bullish to bearish.
As is usually the case, fear has gripped this market and pushed it to a short term extreme, which means it is now time to bet on a reversal. Consider the following:
1) Copper has dropped 51 cents over 18 trading days, scoring in the 3rd percentile of all 20 day drawdowns over the past 3,400 days. A true extreme.
2) Last week's COT report showed Commercials buy over 21k contracts as prices dipped below $3 to $2.99 - This ranked a 100% on all weekly buying by commercials over the past 18 months. While the latest CFTC report will not be out until tomm, and the true impact wont be seen until this friday, we believe at least another 30k contracts were bought into the 2.79 lows.
We score participant activity and net position on a 18month basis, and 20days ago Commercials were at zero - Last week they were already up to 49%, and this week will likely be above 70%. This is telling us, trend followers are shorting into the lows, and they will be quick to unwind once prices begin to reverse.
3) Copper sports a impressive 10-4 record in the month of July over the past 14 years - In 2018 we are down 12 cents - A sharp deviation.
We have already seen signs that the dollar is rolling over on a short term basis, and we saw massive oversold rallies in both Soybeans and Coffee as traders "sold the news" on Friday as the trade war went into effect. We believe base and precious metals will follow suit as the markets begin to digest the extreme moves across assets classes over the past 4 weeks.
We are outright buyers of out of the money calls here (51 days out) - The 2.90 strike is selling for 7cents or $1750. Look for a 1/3 to 1/2 retrace of this waterfall decline as prices rally back towards $3. You can take profits there. Close out on a daily close below friday's low of 2.78.