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Copper: Red Metal Bulls Ready to Capitulate?


What is the red metal saying?

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 -- 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.
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