Our friends over at Dow Jones Newswires were gracious enough to include us in a recent article they wrote on copper. I thought you might find it interesting.
Cheers,
Adam
FOCUS:
Area Around $3.40 Next Key On Charts For Comex Copper
By Allen Sykora
Of DOW JONES NEWSWIRES
Technicians say the area around $3.40 and above is the next key upside chart point for March copper futures on the Comex division of the New York Mercantile Exchange.
Already, the futures have retraced roughly 50% of the sell-off from the Oct. 3 contract high of $3.75 a pound to the Dec. 17 low of $2.8530. They hit a two-month high of
$3.3785 on Wednesday, before consolidating lower.
The area around $3.40 represents resistance based on a number of technical indicators, chartists said. At the moment, the futures appear to be range-bound and moving sideways, said Larry Young, senior trader with Infinity Futures.
"We really need to break out. Obviously, $3.40 right now is major resistance," he said. "We need to build momentum to get through that so we can start chipping away at the highs again."
Many pre-placed buy orders lie around the $3.40 area, Young said. Some traders who went short during the late-2007 decline placed stops here, he said. "Others look at that as a point to get long again," he said.
The 50% Fibonacci retracement of the October-December decline lies slightly above $3.30, a level the market has been on both sides of in each of the last four trading
sessions. The 61.8% Fib retracement is just above $3.40.
"A lot of traders focus on those," Young said.
The high this week of $3.3785 potentially could be the market's test of this 61.8% Fib level, particularly amid concerns about possible economic slowing, said Darin Newsom, senior analyst with DTN.
Otherwise, Newsome explained, he watches what is termed a "five-point top" based on prior major higher highs and major lower lows. Based on this, he said, the recent rally may continue but run into speculative selling somewhere between the $3.41 to $3.46 area. He said the fact that futures are in contango rather than backwardation, as they were for months, indicates less tightness than at one time when they
were in backwardation. The latter is where the nearby futures are more expensive than deferred contracts and is seen as a sign of supply tightness.
"If we get back into the $3.41 to $3.46 area, it could be a selling opportunity," Newsom said. "But if we get through that, it might start to trigger some renewed buying interest."
Adam Hewison, president and chief strategist with INO.com, expects the March futures to rally possibly to the $3.50 area, a target zone based on recently making a head-and-shoulders bottom.
"Certainly (a rally is possible) to the $3.40 level, which represents the 62% Fibonacci retracement," he said. "Potentially, somewhere between $3.40 and $3.50 would be a reasonably good target zone.
"We closed last week (around) $3.15. We're up for the week. We're up for the month. I think the market looks very, very good."
He listed a longer-term target of $4 to $4.16 a pound.
The area around $3.40 is also around the market's strongest level of the last two months or so - $3.42 on Nov. 7.
Copper has recouped much of the October-December weakness even though concerns have surfaced lately about the health of the U.S. economy. Nevertheless, analysts said, this could be offset by strong demand from China, now the world's No. 1 consumer of the red metal. Demand is also growing in the Middle East region, Young said.
"Any slowdown in the U.S. is going to hurt copper, but the U.S. was supplanted by China in terms of gross usage of copper," Young said.
"We're not in a domestic market any more," Hewison said. "We're in more of a global market. It may be bad here but still great overseas. That's what's going to drive the market.
Hewison said "it definitely looks to me like the market has put in a bottom."
Technicians List Key Downside Chart Points
Traders and analysts listed several downside levels that will be important for March copper to hold on any pullback, in order to avoid acceleration on downward moves.
"If we get below $3.1050, we're going to push this market lower. That's a key level on the downside," Young said. The market stopped around here twice early in the month - right at $3.1050 on Jan. 4 and at $3.1060 the next trading day, Jan. 7.
Young said he anticipates a pullback in copper prices in the short term but remains bullish over the longer term, based on the technical picture.
"It looks like right now the Dec. 17 (low of $2.8530) is potentially going to hold as a bottom," he said. "If we can stay above these levels, we could try to move this market
higher."
Technically, Hewison explained that a buy signal occurred in copper futures late last month, based on the pattern on a chart for open-outcry-only trading in the March futures.
"We believe the market made a head-and-shoulders bottom," he said. "The first shoulder was made on 11/21 at $2.92. The head was created on Dec. 18 at $2.87. The right shoulder was around) $3.02 on Dec. 31. And neckline for the head-and-shoulders was $3.20."
He listed key support around $3.20 in the near term and $3 in the long term. "If we were to take out the right shoulder around $3.02, I would consider the pattern to be broken," Hewison said.
Hewison said the market's recent rally occurred after a pullback to support to prior retracement levels around $2.88 to $2.95 last month. The market dipped briefly a few cents below this last month, but did not close below it. The next major support is around these lows, he said.
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