The copper market is frequently referred to as the, "economist of the metals markets" because the supply and demand issues associated with this market lead directly to construction and manufacturing. Therefore, commercial long hedgers actively locking in prices for their future usage is seen as a bullish sign for the economy because construction and manufacturing managers are trying to lock in their production supplies for an expected growth in demand. Obviously, commercial long hedgers setting a record net long position would be indicative of their expectations of increased end line demand within their manufacturing sectors. This is exactly what led us to our late January notion that, "... the commercial traders’ buying near $2.50 is extremely supportive even in a world of slowing Gross Domestic Product."
All this is well and good but what would happen if the commercial copper traders sitting on their record net long position decided that they were wrong and began offsetting their long hedges at currently weakening prices?
Commercial copper traders are holding a record net long position near the top of their channel.
Their sudden shift to selling could seriously dampen the market given the number of contracts they need to unload and the prices at which we're currently trading. Twenty-five years of copper prices underscored by the net commercial trader position clearly shows two things. First, regardless of the commercial traders' position, the copper market has only mounted one significant rally that began above the $2.50 per/lb price level. The one that did occur above $2.50 was in 2011 and commercial traders added more than 23,000 contracts to help push prices higher during the rally. The current commercial trader position is currently just over 40,000 contracts. This appears to be what's left of a failed attempt to support prices by the commercial traders who just set a new net long record near 54,000 contracts in January.
Their recent selling has been strong enough to shift commercial trader momentum into negative territory for the first time since late August of 2014. We've highlighted the periods of negative commercial momentum over the last few years to give you an idea of what commercial selling looks like in the underlying market when it's happening. Copper futures clearly fell hard in 9 out of 13 observances of negative commercial trader momentum. Furthermore, only one period in late 2010 through early 2011 showed any gains that the copper futures were able to hold through their respective periods of negative commercial trader bias.
This brings us up to speed in the current market situation. Referring back to the, "economist of the metals market" statement, I want to briefly mention the increasingly negative commercial bias in the equity markets as a parallel concern. Briefly, if general manufacturing is expected to slow down, the stock market and copper markets would both be adversely effected. Therefore, the commercial traders' actions within the equity index sector correlate well with their counterparts' actions in copper. Finally, regarding the stock index futures, we expect lower prices ahead as discussed last week in , "Equity Rally Waves a Caution Flag."
The current chart focuses on the mechanics of generating an official COTSignals, sell signal. The setup is a brief three step process.
1) Only trade in the direction of commercial trader momentum, which just turned negative.
2) Wait for short term market momentum to build up tension against the commercial position as measured by an overbought/oversold reading on our short-term market momentum indicator.rally pushed this into overbought territory.
3) Once the market reverses and the short-term market momentum indicator has dropped below the overbought threshold, we issue the "COT Sell Signal."
COT Signals full trading screen with the futures, futures market momentum, net commercial trader position and commercial trader momentum all put together.
Finally, whatever the swing high or low ends up being as the market reverses will be the price at which our stop loss order is placed.
This copper futures trade could get interesting if we find that the last couple of weeks' buying was not enough to build a solid base to hold the market. Commercial traders may find themselves selling the market hard - down to new lows under $2.50 per pound.
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