Housing Market Weakness Means Copper’s Heading Down

Copper prices took off in 2003 and then accelerated again in 2005, driven by strong economic growth worldwide, a strong housing market in the United States, and China’s insatiable appetite for the metal.

Since early November 2006, copper has been caught in a nasty downtrend after breaking out of a sideways channel between $3.20 and $3.60. The weak housing market in the United States, along with evidence of a pending economic slowdown both in the U.S. and internationally, could continue to reduce the demand for copper and cap any upside rebound.

In the U.S., the housing market is clearly in the doldrums, as evidenced by the trend of weak building permits and housing starts. Higher financing rates and a sense that the housing market will continue to struggle has driven buyers to the sidelines while forcing sellers or speculators to dump investment properties at reduced prices. New housing, a major user of copper for numerous applications including wiring and plumbing, is dead at this time.

In the semiconductor area, mixed growth projections going forward are also putting some pressure on copper prices. Copper is used in integrated circuits, chips, and printed circuit boards. We also find copper in other technology applications, including networking and communications. A move down in technology could help drive down copper prices.

The March 2007 high-grade copper futures contract in the COMEX is bearish at this time. The MACD Oscillator has crossed over to the sell side, and the Relative Strength is weak, which points to further softness in copper as we move forward.

On the chart, look for support at $2.40. A break below could drive copper down to the 14-day 20% RSI at $2.05. On the upside, I expect to continue to see selling pressure at the 20-day and 50-day moving averages of $2.59 and $2.88, respectively.

My feeling is that until we see solid evidence of renewed strength in housing and the economy, copper will not move higher. It just may have more downside risk.