From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Commodities have been on a tear, with the Bloomberg Commodity Index recently posting its best week since 1970 and the CRB Index rallying more than 25% year to date.
Despite the broad strength from commodities, Dr. Copper – a key economic barometer – has yet to break out like so many of its peers.
After making a new all-time high last Friday, buyers were unable to sustain the move, and price retreated into its former range.
While it’s great to see so many other contracts trending higher, bulls really need to see copper join the mix. If this is truly a new commodity supercycle, it better break out from this consolidation.
It is that important to the overall asset class.
Let’s break down the various technical scenarios for copper’s recent move and discuss what they mean for the entire space.
First, the move could have been a premature breakout:
We also call these false starts. They're pretty normal occurrences in continuation patterns.
Buyers have been chipping away at the 4.88 level since May of last year. Under the premature breakout scenario, Copper just needs more time to absorb the overwhelming supply at this critical resistance zone.
As long as price holds above the former 2011 highs around 4.59, we’re likely to see another test and possible breakout very soon. And the current range remains a healthy consolidation within an ongoing uptrend.
Long story short, the ball is still in the bulls' court.
We’re leaning in direction of a false start and eventual breakout. The reason for this is simple: This is a continuation pattern within the context of a primary uptrend.
As the primary trend is still intact and pointing higher, we want to make the bet that the resolution from this range will also be higher.
But this is just the textbook answer. Anything can happen.
A more bearish scenario is probably playing out in the case copper loses the 2011 highs. In this environment, things are likely to get messy.
This would also increase the likelihood that last week’s new highs will materialize into a failed move.
One thing we know about failed moves is they often result in fast moves in the opposite direction.
In other words, look out below.
We’re likely to revisit the lower bounds of this range under this scenario. We should know in the coming days/weeks if this is indeed a failed breakout.
If Copper futures lose the 4.59 level we’re watching the 2021 lows near 4.00 for potential support.
Those former lows near 4.00 are critical. Continued selling pressure will most likely follow if price undercuts this key level.
More importantly, this would signal a potential reversal in the primary trend.
If this crucial economic barometer is sliding to new 52-weeks lows and resolving to the downside, it questions the global growth narrative and our commodity supercycle thesis.
Commodities, in general, are likely to see some serious downside volatility if this is the case.
But let’s not get ahead of ourselves. For now, copper is hanging tough after slipping a bit earlier in the week. As for the rest of the commodity market, it remains red hot.
We’ll continue to watch this chart closely for evidence of increased downside risks for copper and the entire commodity space.
Or, in the case this was just a false start, an epic breakout which would tell us it’s “all systems go” for commodities.
Stay tuned!
And be sure to check out our weekly trade idea from our natural resources and commodity-related scans below.
COT Heatmap Highlights
US Dollar: Commercials are reducing their net short positioning after nearing three-year extremes.
Soybean Meal: Commercial hedgers have their largest net short position in three years.
Coffee: Commercials continue to unwind their historic net short position by reducing their exposure by 13,268 contracts.
Feeder Cattle: Commercial hedgers are less than 5% away from their largest net long position in three years.
This week we’re outlining a $4.9B steel stock from our Natural Resource Stocks list. This is Commercial Metals Company $CMC:
This stock is resolving higher from a decade-long base as commodities and commodity-related stocks continue to show relative strength.
We want to be long CMC above 39.60 with an upside objective around 60 in the coming 2-4 months.
Since we’re on the subject of steel stocks, we also want to point out United States Steel $X:
US Steel is one of the bellwethers from our weekly Commodity Report, and it’s breaking to new multi-year highs. This bodes well for the entire industrial metals space. The stock is also offering a great risk/reward at current levels.
We want to own X as long as it’s above 31.25 with an initial objective near 47.50 over the next 2-4 months.
Please check our Commodity Report below for our structural view of this stock, as there's plenty of upside potential in the coming quarters and years.
