Copper’s plunge due to Chinese growth concerns got our attention last Sunday when we downloaded the most recent Commitment of Traders report and found that commercial traders were strong buyers on the decline. Our methodology uses the momentum of commercial buying or selling as the first screen for our market bias. Their buying in the current context of the market suggests that, as a group, they have few worries regarding future demand for copper at $3 per/lb. We tend to trust the actions of the groups that either produce the raw material or, are end line consumers of a given commodity. We feel that this places them in a position to ascertain the value of their respective markets in ways that individual research firms cannot.
We don’t simply jump in when commercials turn positive or negative on a market, however. Twenty plus years of trading has taught me that the single most important facet of successful trading is managing risk. Therefore, the second step in our process is to wait for general market movement to create an overbought or oversold situation against the dominant commercial bias. In this case, the dominant commercial bias is positive and the general market movement has created an oversold situation in the copper futures.
Finally, we wait for the market to begin its reversion to the mean. This keeps out of free falls and manic spikes. The copper market has turned higher and our short-term proprietary momentum indicator has triggered a buy signal. You can see these signals in the copper market plotted on this chart. Back to risk management, we always place a protective stop at the market’s swing high or low, respectively. Our protective stop is currently at the low of $2.8770 however, today’s move as a breakout above yesterday’s inside day will allow us to tighten that stop considerably for tomorrow’s trade.