Copper Sitting Near The Highs

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Copper continues to flirt with recent highs.

Stocks on the LME continue to fall.

Infrastructure rebuilding will put a floor under the red metal.

Support and resistance levels for copper.

Expect a challenge of $3 per pound.

Last year around this time, the price of copper traded to the lowest level since April 2009 when the nearby COMEX futures price fell to $1.9355 per pound. While a multiyear low, it appeared that copper was in lots of trouble last January. Before 2005, the price of the red metal had never traded above $1.6065 per pound.

In 2008, in the wake of the global financial crisis, the price of the nonferrous metal dropped from highs of $4.2160 to $1.2475 per pound in a matter of seven months. Then, in a highly volatile move, copper rallied all the way back to a new all-time high at $4.6495 per pound in February 2011.

The red metal then made lower highs and lower lows until last January and visions of the price action in 2008 danced in the head of traders and analysts. Last January things looked pretty gloomy for copper but the price held.

In the aftermath of the January 2016 lows, copper entered a long period of consolidation that kept the price in a range from just over $2 per pound to under $2.32 until November when the price broke the upper end of the consolidation pattern. Stocks on the London Metals Exchange (LME) began to decline and the election of Donald Trump as the forty fifth President of the United States quickly lifted the price of copper to highs of $2.7530 on the March COMEX futures contract on November 28. Copper has been trading in a range from that high to lows of $2.4480 since, never returning to the technical level from which it broke out to the upside. Over recent trading sessions, copper has once again rallied to the upper end of the trading range and now it looking like it is going to challenge those late November 2016 highs.

Copper continues to flirt with recent highs

The multiyear bearish price pattern in copper that began in 2011 ended in early 2016 when the red metal hit lows at $1.9355 per pound. Source: CQG

As the weekly COMEX copper chart highlights, the market broke out to the upside during the week of November 7, which just happened to be the week of the Presidential election in the United States. Open interest, the total number of open long and short positions in COMEX copper futures has increased to all-time highs. Rising open interest as the price of a commodity appreciates provides technical validation for the move. Additionally, the slow stochastic which is a momentum indicator has moved to an oversold condition but it continues to point to higher prices, at the moment. The trajectory of the rally remains intact. Relative strength is not yet in overbought territory but it is rising which is another positive technical sign for the red metal.

A closer look at the weekly price picture for copper shows that although the price has been consolidating since November, it is leaning higher making higher lows over the past six weeks. Copper closed on Tuesday, January 31 at $2.7260 per pound on the nearby March futures contract. On February 1, the red metal made a high at $2.7380, just 1.5 cents lower than the November 28 peak which was the highest price since June 2015. While the technical picture for copper continues to look positive, the fundamentals are supportive of more price gains.

Stocks on the LME continue to fall

Just a few short months ago, warehouse stocks on the London Metals Exchange stood at over 350,000 metric tons. As of January 31, there were only 261,325 tons in LME storage facilities. Falling stocks tend to add support to the price of a commodity. The LME is the worldwide hub for copper trading. It is the exchange where most producers and consumers come to hedge their output or requirements. The LME is a forward exchange which provides more flexibility to hedgers as contracts are not monthly, rather they are for 90 days forward. Therefore, each business day can be a delivery period which makes physical transactions easier for those in the industry. Meanwhile, the COMEX futures market is a standard future with copper futures and delivery on a monthly basis. Like the LME, market participants can make or take delivery of the red metal on COMEX and the exchange has several warehouse locations. While the LME stocks have been moving lower over recent months, COMEX stockpiles have been increasing. As the chart shows, COMEX copper stocks have been increased by about 19,000 tons while LME stocks have decline by about 80,000 tons since December 20, 2016. The reason for this is likely the same reason that copper took off to the upside after the November 8 election in the United States.

Infrastructure rebuilding will put a floor under the red metal

On the campaign trail, the forty-fifth President of the United States advocated for a massive building project to rebuild crumbling infrastructure in the nation. Rebuilding roads, rails, bridges, tunnels, airports, and building a security wall across the Southern border of the United States is an enormous construction undertaking. The project will require the basic building blocks of infrastructure which are metals, minerals and energy. When it comes to building, copper is a critical component in the equation. The transfer of stockpiles from LME warehouses to COMEX storage facilities makes sense with a major U.S. project on the horizon. Moreover, the net drop in stocks of around 61,000 tons over the past 60 days when it comes to both exchanges is the likely reason that copper is now flirting with the upper end of its trading range since November.

Support and resistance levels for copper

Since copper broke out of a long-term bearish trading pattern in November that dates back to 2011, we must look at the monthly chart to establish critical support and resistance levels for the red metal. Source: CQG

As the monthly chart shows, support for copper is at just below $2.32 per pound level which stood as resistance before copper was able to break to the upside in November. We need to go back to May 2015 to see the current technical resistance level for the nonferrous metal. The next level above $2.7530 is at $2.9610 and above there the $3 psychological level comes into play. Copper traded around the $3 level from March through November 2014 before the price finally broke to the downside. Therefore, $3 is a technical area that contains a cluster of past trading activity.

Expect a challenge of $3 per pound

I expect a challenge of the $3 per pound level in copper in 2017. A rally to $3 means that copper could have another 10% on the upside, after rallying almost 18% since November. There are three reasons why $3 is likely in the cards for the price of copper.

First, President Trump won the Presidential election alongside a Republican house and senate which means that his infrastructure building project will likely turn into legislation early in his first term. The approval of a massive construction project will increase the demand side of copper's fundamental equation and will likely cause a rally in the price of the red metal.

Second, even though interest rates are likely to rise in the U.S. in 2017, they remain at very low historical levels. It will take two interest rate hikes by the Fed to get the Fed Funds rate above the 1% level. Low interest rates make the cost of carrying commodity inventories low and in an environment where demand and consumption are on the rise, many businesses will increase inventories of raw materials and copper is no exception.

Finally, the technical picture for copper has not looked this good since 2009 and the base metal has a penchant for moving in dramatic fashion when fundamentals and technicals line up in the same direction. In 2009, it was China building inventories for building within the nation. In 2017, it may be the richest nation in the world that is preparing to not only increase inventories but to consume them.

The odds are that copper will put up a $3 per pound print on the nearby COMEX futures contract in 2017. Shares in copper producers like Freeport McMoRan (NYSE:FCX) and Southern Copper (NYSE:SCCO) as well as other copper producing companies like Glencore, (OTCPK:GLNCY), BHP Billiton (NYSE:BHP), Rio Tinto (NYSE:RIO), and Vale S.A. (NYSE:VALE) and others will add to impressive gains over recent months. Copper is not going to go higher in a straight line, expect a wild ride. However, $3 is looking like a magnet for copper and with the red metal sitting near recent highs it looks like it is chomping on the bit to make a new higher high shortly.

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

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