Copper has been on a tear since the May low rocketing 30% higher. However we are seeing numerous warning signals that at least a retrace is due. Lets take a look at the evidence.
1) We are seeing bearish price performance on both the daily and weekly charts.
This is happening after a 17 trading day rally that has run 37 cents, 12.8%. Measuring all intermediate up-trends within a 20 Trading day interval going back to 2005 (3,223 trading days), this rally scores in the 88th percentile. This isn't a sell signal, however it does indicate this leg is getting long in the tooth.
Please look here at this daily chart:
Now at the weekly:
Both charts are showing bearish reversal candles on increased volume. Further the 3PC oscillator is triggering a Over Bot sell signal on the daily charts, and a bearish non confirmation of new highs on the weekly charts.
2) Next, looking at this week's Commitment of Traders report, we see extreme bearish positioning by commercials on both a 18m + 5yr basis.
Baseline actuarial tables show that since 2005, the 70th percentile up move for copper over a 20 Trading day interval is 7.25 cents, while down is (6.1)cents for bull:bear odds of 7:6.
However, when Commercials' 18m Score is < 7%, we see the 70th percentile moves over 20 Trading days at 10 cents up by 10 cents down. This is significant for 2 reasons.
A - The 70th percentile down move increased from baseline by 66% from (6.1) to now (10).
B - Bull:Bear odds have dropped from 7:6 in bulls favor to now 1:1
3) We like to monitor how base metals are trading on the Shanghai Futures Exchange as a leading indicator for base metal and commodity trading in the U.S. Currently there is quite a bit of bearish action across the commodity complex on the SHFE with Trends in 9+23 day now down for many commodities like Aluminum, Bitumen, Steel Rebar, Tin, Lead and Hot Rolled Coil Steel.
Conclusion
While Copper has had a terrific run recently, odds are favoring a pullback with bearish chart action, bearish commercial positioning, and developing weakness across the base metal complex. A retrace to the 50%-61.8% Fib levels offer 9-13 cents of downside profit for shorts here.
Traders and hedgers can position for lower prices or look to ring the register on profitable bull positions.
The one caveat here is that HG on the Comex doesn't have a very liquid options market, which can make controlling risk a challenge when trading this contract. Keep this in mind and be sure to trade with a reduced position size in the event prices continue to advance.
Good trading
3ptCapital