Macro Technical View: Staying Short May Copper Below 370

 |  Includes: CPER, CUPM, JJC
by: Craig Coatney

May Copper closed below horizontal support at 370+ on Tuesday. And now former support should act as resistance. (Note that a daily close back above Tuesday's 378.25 high - the day/bar in which support was broken - will negate this bearish development).

After aggressively selling off once below 370.25/50 (the lows of February 17 and April 9 respectively), the ensuing weakness in the afternoon didn't correspond with the weakness seen in the equity sector. From purely a technical perspective, this HGK2 downward reticence may have been derived from near-term support, which resides from 360.10 to 364.10.

This is by way of previous daily highs as well as the 50% retracement of the December low to February high. See first chart below (Charts created using CQG).

Click to enlargeChart of daily May CopperClick to enlarge

But from a macro perspective, if weakness persists, a weekly close below the October low of 299.40 can create a larger downside technical objective as evidenced by the weekly chart below.

Weekly Continuous Active chart of May CopperClick to enlarge

Allow me to get way, way ahead of myself here. In a worst case scenario - meaning an absolute purge of the risk-on environment - then a weekly close below 299.40 creates a minimum measuring objective of 132.65.

This would be from a conventional Head and Shoulders pattern. The pattern amplitude of 178.65 is subtracted from trendline (or neckline) support, which now arrives at 310.10. We pegged the trendline at 311.30 for the future penetration.

Now even if you are not a believer of this Etch-A-Sketch mentality, a weekly close in copper below the October 2011 low will have the weekly and daily trends resolutely bearish. And European concerns and/or a China slowdown, or other unforeseen uncertainties could continue to add to the bearish urgency.

The potential objective of 132.65 certainly seems aggressive, but again it only becomes relevant if 299.40 gives way. And in comparison to the late 2008 sell-off or the late 2010 rally, it is not altogether unrealistic.

This worst case scenario is simply something to be aware of in case this recent bout of weakness in copper turns into something more; akin to a public service announcement for copper bulls and bears alike.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.