From Last week but makes interesting reading....
Points win for the bulls but stand-off with bears continues
Metals Insider - 29 January 2007
MI WEEK IN REVIEW:
Last week’s LME copper price action generated a weekly gain of $205 per tonne, basis 3-month metal, which amounted to something of a points win for the bulls. However, the close at $5,810 was firmly within the current $2,500-2950 battle-ground range and ensures that the current bout with the market’s bears will go to a fresh round this week.
The bottom end of that range denotes the series of lows we’ve already seen since the start of 2007. There is a lot of speculative money betting that this support line will be broken, heralding another major leg lower in price.
The CTA community is at the forefront of this mass bear attack. Its collective short on both sides of the Atlantic reached unprecedented levels in the first part of last week. As of the close of business Monday, our fund-watching sources in London estimated that this momentum-trading entity was collectively short of copper to around 96% of historic capacity. That’s equivalent to a position of around 1.44 million tonnes and is without precedent in the current price cycle.
The same held true of fund positions on the COMEX market. The most recent Commitments of Traders Report covers the period up to last Tuesday and it showed a further increase in the speculative net short position to 22,155 contracts (equivalent to 553,875 tons), also a cycle high.
But the closest the bears got to their target in London last week came on the Monday dip to $5,515. The market had started the week in bright form with a move from the previous Friday’s close at $5,605 to $5,660. The sell-off followed the release of LME stocks figures, showing continued build in visible inventory, a theme that played throughout the week, albeit with increasingly muted impact on the price action.
In the event the support line was defended by a hedge fund on Monday and its presence scared the opportunists away, helping copper recover to $5,620 at the close.
Tuesday copper got further support from a hedge fund, this time in the form of bullish comments from David Lilley, a partner in Red Kite Management, the powerful but normally reticent fund that the London "street" spends increasing amounts of time trying to second-guess.
"Copper prices have gone down further than I expected…It is a good time to buy," was Lilley’s key sound bite. And as if by magic, London 3-month metal hauled itself up above the $5,700 level later that day, spiking up to $5,770 before dipping back for a close at $5,660.
The move sparked the first tiny panic among the mass bear ranks—just a minor movement on the fringes of the herd. The first few started covering back their shorts and that trimming of positions helped copper make it as far as $5,900 on Thursday.
Critically, though, the mass of the bear herd appeared unperturbed by events. There are divergent opinions as to where the bulk of the trailing stop-loss orders are located. Some cite the $5,950 level as the first key area, since a move through there would complete a double-bottom chart pattern formed by the recent price action. Others think that a mass rush for the door will only occur some way above that at around the $6,100-6,200 price level.
Either way, copper never got there last week, Friday bringing more consolidatory action, which ended in the close at $5,810. It did enough to cause the CTA fund community to trim its short exposure back sharply to 80% by the end of the week but it is clear that only further price strength is going to cause the stampede being targeted by some of the market’s more predatory players.
We’ve been highlighting for several weeks now the size of the speculative short position that is hanging over the copper market and the potential for bloodshed if that short is forced to cover. Last week brought the first sign of what might happen. CTA covering in London took the price higher even as more and more metal was flowing into LME warehouses.
That flow of metal should give the bears some comfort zone, as will the continued contango structure across the front months of the LME market. The benchmark cash-3-months period ended the week valued at $36 contango.
Both features of the market are still keeping the bulls at bay for now. Interestingly, the trade itself seems divided as to what to expect next from copper. Our sources noted some genuine physical consumer pricing activity last week. It has been conspicuous by its absence for some time now. But so too has been forward producer selling and there was a smattering of that around as well last week with the focus on 2008.
The problem is that copper is once again displaying markedly divergent geographical trends. The tidal wave of surplus metal that hit exchange inventories in the US over the fourth quarter of last year seems to have lost steam with anecdotal reports suggesting some sort of pick-up in spot buying.
Rather, the still strong up trend in LME stocks now reflects deliveries of metal in Europe, where physical premiums still look very soggy and consumers seem to be more than sufficiently covered on their immediate needs.
LME stocks in Asia are moving in the opposite direction—out the warehouse door and onto a ship heading for China. Last week brought confirmation with the release of the full trade figures for December that China’s imports of refined metal soared in December. All the reports coming out of the country this month suggest that that surge is continuing and will probably run all the way up to the Lunar New Year holidays next month.
It is what happens after those holidays that will be critical for copper. Are we seeing the start of the long-heralded but so-far-elusive re-stocking exercise across China, up and down the supply chain. Or just a brief rush to the January sales to fill the bags with cheap-price copper, i.e. that which starts with a "5" rather than a "6" or "7"? For us the jury is very much out, despite the efforts of one newswire to talk up the December report with some slightly wild-looking apparent consumption deductions—already corrected lower once and maybe due another editor’s check in our opinion.
There has been little other hard news for either side to use as ammunition. The only supply-side potential disruption right now is the strike deadline (Wednesday) at BHP Billiton’s Cerro Colorado mine in Chile. But with annual production of 130,000tpy, we doubt it’s big enough to cause any real fright for the bears, particularly when 7,000t plus is being put onto LME warrant every day.
What will frighten them is if one of the predators pushes the price up further towards the cumulative stop-loss positions. Last week brought just a taster of what might happen then.
Pivot: TL4 and 5212
Preference: Copper gained ground last week, supported by the short term trendline TL1. The market recovered well above the lower Bollinger band and TL4, started from the May 2005 low. Our key pivot support holds at 5212, the 62% Fib level of the move higher from the May 2005 low of 2948 to the May 2006 high of 8875. In the short term, the market should head higher supported by TL1. In the long term, the market is likely to recover higher as long as TL4 holds. However, resistance at TL2 might limit potential gains.
Alternative: A sustained move under TL4 and then 5212, the 62% Fib level of the move higher from the May 2005 low of 2948 to the May 2006 high of 8875, would be very negative. Support is at 4649 and 4252, if 5000 fails to hold.