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Copper: Red Metal Bulls Ready to Capitulate?

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What is the red metal saying?

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Observe the chart on display below, revealing the plot of the March 2007 COMEX Copper contract (as of Tuesday's close), with $3.08 marked as the first line of support for this market, against a technical background that strongly suggests a serious downside test is unfolding... at least.

My firm spotlights the massively wide head-and-shoulders topping pattern and the recent rally, that was soundly rejected dead-on the previously violated uptrend line. Further, we highlight the action in the moving averages, as the med-term 100-Day EXP-MA reversed direction following the downside violation by price, and, acted as staunch overhead resistance, during last week's rally attempt.

A move below $3.015 would constitute a full-blown technical breakdown in the March COMEX Copper contract, with penetration of the long-term 200-Day EXP-MA at $3.00 providing solid confirmation. My firm expects it to happen.



Indeed, my firm's bearishness intensifies when we dissect the action in copper spreads and swaps.

First note that the March-May Calendar Spread traded on the COMEX has virtually collapsed, to the point of 'free-falling' from a steep backwardated price structure, into a deepening contango, as evidenced in the daily chart seen below. Note the bearish downside crossover executed by the med-term 100-Day EXP-MA, and the 200-Day EXP-MA, with both now trending lower as well.



Going further 'out' along the 'strip,' on the LME, I shine the spotlight on the similarly negative background feature defined in the chart below in which I plot the 3-Month/27-Month Copper Swap. Clearly, this is a bull market 'tightening' in supply-demand that has collapsed of late, as implied by the narrowing in the swap's backwardation and violation of the multi-year trend towards higher nearby price premiums.



Taking a longer-term perspective of the 3-Month/27-Month LME Copper Swap, observe the weekly chart seen below, revealing what might be described as a pricked-bubble!

Note the violation of the long-term 52-Week Moving Average, which is turning down, directionally this week, thereby 'completing' the 'reversal.'



Eye-opening is the only way to describe the long-term weekly overlay chart on display below in which I compare the action in the LME Forward Swap (charted above) to the flat-price of COMEX Copper.

Indeed, swaps and spreads led the way higher in price, amid supply-tightening and stock drawdowns in 2003-05 and thus, the collapse now implies that the downside risk for flat-price is substantial.



When I squeeze the chart and shorten the time frame for an overlay comparison (same as posted previously), I can more easily define the recent, near-unprecedented level of 'divergence' as it relates to the normally, highly positively correlated derivative markets.

Just as the swap pointed to a copper price above $2 in 2004, now the swap is pointing back below $2.



Already, my firm can identify the 'source' of demand side weakness, a la our repeated and detailed Money Monitor dissections of all pertinent US housing and construction data (see www.weldononline.com) -- and now -- that source can be 'seen' in the overlay chart below. In this chart I simply plot the futures on COMEX against the 'futures' contract on LME. The US based contract is leading lower, as I would expect, given the shift in fundamental focus from rising Chinese demand to eroding US demand.



My firm has been and remains bearish on Copper, with an intensifying 'gut-feeling' basis which 'reads' that downside risk is about to blow wide open.
Position in copper futures
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