Don’t Be Surprised if You See a Decline in Copper

Copper prices have been on a nice upward trend since June 2005, driven by good economic growth, a strong housing market in the United States, and an insatiable appetite from copper hungry China. But the charts now show some hesitancy, as there are worries regarding demand.

 The concern relates to China, which has been a major international driver of numerous commodities due to continued strong growth in its economy. When there are demand concerns emerging from such a country, you have to listen. Any shock out of China can have a devastating impact on numerous commodity markets.

 It was recently reported that China’s State Regulation Center of Supplies Reserve had failed to sell all its copper, even after being offered in its second auction in a week. This factor is crucial for copper prices, as much of the copper’s appreciation on the charts have been driven by expectations of mammoth demand out of China. So, when China’s State Regulation Center could not sell of its copper, you really need to take a step back to think. Moreover, sales from China clearly implied reduced demand for copper in foreign market, and this could impact prices on high-grade copper on the COMEX.

 The December 2005 high-grade copper futures contract in the COMEX remains bullish, as does the trend. But, given the buying, the near-term picture looks technically overbought, and the Relative Strength has been flat.

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 The MACD Oscillator also just crossed over to the neutral/sell side. Since June 2004, this occurrence has materialized on the chart on two occasions prior to now. In each of the previous two occurrences with the MACD, copper traded sideways but managed to hold. What this tells us is that copper may be setting up for another period of consolidation.

 Given the demand concerns out of China, don’t be surprised if you see a near-term decline on the charts.