On September 18, 2018 I wrote a
short piece on copper. At that time I was bullish but the red metal, contrary
to my opinion, went slightly up and then entered a pretty long consolidation
period. And up to now nothing has changed.
Further, consolidation periods
are hard to analyze. However, there are some tools that may help to identify
the state of the market during these problematic periods.
In our case - as the chart below
shows, since middle September 2018 the copper has been trading in a narrow
range of $2.65 – $2.88 per pound (the green rectangle):
Source: Stockcharts
It is a stressful situation for
investors and speculators and many of them are wondering what next is on the
cards. Let me try to give you a clue using the Commitments of Traders reports.
To remind you, these reports disclose the positions held by a few groups of
traders involved on the copper futures market. Today I would like to discuss
the positions held by the so-called Money Managers (big speculators trading copper
futures). Let me divide these traders into two groups: the bulls (Money
Managers holding a gross long position in copper futures) and the bears (Money
Managers holding a gross short position).
Now, according to the COT
reports, between September 18, 2018 and November 17, 2018 (the consolidation
period) the bears cut their bearish bets
by 15.6 thousand contracts while the bulls increased their position by 14.5
thousand contracts. What does it mean? Well, it looks like the current consolidation
period has been used by the bulls to increase their bullish position in copper
futures. On the other hand, the bears have retreated losing the initiative on
behalf of the bulls.
So the final outcome is as
follows: in my opinion, the copper is getting ripe for another leg up. This
thesis is additionally supported by a few historical facts. For example, the
previous consolidation period (April 2018 – May 2018) looked similarly – the
copper prices were flat and the bulls were taking the initiative; then, in June,
copper prices started a strong move up.
Last but not least – look at this
chart:
Source: Simple Digressions
The chart shows the global stocks
of refined copper reported by the world’s main exchanges: COMEX, LME and SFE
(the Shanghai Futures Exchange). Note that since the end of March 2018 the
stocks have gone down by 605 thousand tons (a drop of 57%). Definitely, it is a
long-term bullish signal for copper but we should keep in mind that the
physical market is of limited value as long as trading decisions are concerned.
