Many traders were likely looking for some sort of pullback in copper toward the end of last year after the market’s remarkable run from December 6 to December 28—a stretch of 15 consecutive days with higher highs and/or closes that took the March futures 12% higher to $3.31/lb. It was a smelter-hot move, and copper obliged by embarking on a relatively gradual, some would almost say peaceful, downturn that seemed like it may have been losing momentum last week around $3.18.
On Tuesday, though, the March futures dropped sharply—nearly 3% intraday—taking the market swiftly to (and beyond) the 50% retracement level of the December rally. Technical traders often look for at least a temporary reversal when a market gives back roughly half of a price move, especially if the larger trend is considered intact. It’s a way to try to take advantage of either a “technical” bounce (stopping yourself out if the retracement level is subsequently penetrated), or, better yet, to get in on a reboot of the previous trend.
In this case, copper roared back to the upside the next day, gaining more than 4% intraday, likely bewildering traders who shorted the previous day’s breakdown, thrilling 50%-retracement buyers, and leaving those on the sidelines wondering what would happen next.
On the fundamental side, little seems changed since mid-December, when “Penny for your thoughts” noted that forecasts for continued economic growth and supply/demand dynamics supported higher copper prices. Earlier this month both Bank of America/Merrill Lynch and BNP Paribas cited bullish factors going forward this year, including increased global infrastructure spending and potential supply disruptions stemming from South American mining labor negotiations.1
Copper’s surge yesterday seemed to suggest bulls were still active, but given the size of the rally, it was fair to wonder whether the window on a long-copper play had already closed. A move below Tuesday’s low of $3.1080 would negate the near-term bullish sentiment, but a test of that level—or at least a little give-back of yesterday’s rally—can’t be ruled out. And that level isn’t exactly close; midway through yesterday’s session, traders thinking about going long would have had to risk around $0.11 ($2,750 per contract) on a test of Tuesday’s low.
In such situations caution can be the better part of valor. A look at the intraday (15-minute) chart of March copper (above) highlights the magnitude of yesterday’s rally. Short-side traders may consider getting in immediately when viewing such a chart, but long-side traders can opt to wait for a market to retrace at least some portion of this type of hyperbolic run-up before entering.
With this type of approach a trader risks missing out on a move, but the goal should always be to get into positions with as much of an edge as possible. There are always more trade opportunities in the wings.
1 Financial Times. Copper to keep its shine on upbeat outlook for industrial demand. 1/8/18.