At the end of March we highlighted the growing disconnect between S&P 500 (SPY) and Copper (JJC). We initiated a Copper short based on a break of the wedge pattern that had been building over the past 5 quarters. Based on deteriorating macroeconomic conditions and the current price action in Copper, we started the short trade idea at $3.50 and suggested that the metal may find initial support at $3.20 and eventually succumb to downside pressure and move into the $3.00 area. Copper made a low of $3.04 on May 1st.
The 3-year weekly chart that we used to highlight the wedge in our previous report now shows a clean break of the wedge and the metal's price has rapidly advanced towards our initial projected support point of $3.00.
The poor May 1st Chinese PMI number provided excellent clarity on the slowing global demand that we highlighted in our previous report. Additionally, the LME warehouse stock levels pushed through their previous 5-year high of 550,000 to 618,000, a 12% increase.
On a short to medium term basis, the short setup still shows a lot of potential for further movement to the downside. A key component of any trade is price action. In our short setup case, we want to make sure that each rally off the lows is on lower volume relative to the downside days. April 24th, 25th, and 29th are prime examples of low volume bounces only to be met a day or two later by high volume selling. Additionally, one can see that the 20-day exponential moving average (EMA 20) has kept a tight lid on any possible upside movement.
Bottom line: While the U.S. employment numbers from last Friday sent Copper and the S&P charging to the upside, the overall downtrend since our initial setup is still intact. Furthermore, we feel the macroeconomic climate has not changed drastically enough to take off our short idea. Moving stops down to breakeven at this point is prudent and always "trim and trail".