London's calling copper down

Since I don't have a subscription to the Financial Times, I have to take this quote from the FT found in MarketWatch on face value:

On the positive side, miners such as copper expert Xstrata (UK:XTA: news, chart, profile) supported the index.
The gains came after earlier sector declines following a report in the Financial Times newspaper that suggested sharp gains in copper prices over the last five weeks were in part driven by large investors -- including China's State Reserve Bureau and New York-based hedge fund Ospraie Management -- unwinding short positions.
The report, which didn't name sources, also quoted one trader as saying that they believe prices could now contract sharply.

And then there's this Reuters report:

LONDON, May 8 (Reuters) - Base metals riding a bull market could be in for a big downside correction, based on technical signals, chart analysts said on Monday.

Copper, which has broken all records, could fall as much as $2,000 a tonne from a recent record of $7,800, and when it goes it could drag others down as well.

"When copper falls, so will aluminium, and that is true of zinc, nickel, or whatever," independent metals analyst Cliff Green said.

"It is like an airborne shot of wildebeest on the plain -- if you turn the first two, the rest of the herd will follow."

It may not spell the end of the bull run, analysts said, but it would be a substantial blow, chart analysts said.

"Such exaggerated (copper) gains as have been seen here in the past few months tend to be followed by an equally sharp reversal and leave behind a top that is not re-tested for some considerable time -- potentially many years," London Metal Exchange (LME) trader Triland Metals said.

Technical charts are tools used by investors to predict future price movements based on past performance. Commodity markets, which are prone to sharp price fluctuations, are typically driven to peak-and-trough extremes by technically motivated action.

Base metals, such as copper, zinc, and nickel, all recently hit record peaks -- the culmination of a two-year bull-market, with recent, almost vertiginous, upward movements among the largest on record.

Traders have become wary of sell-offs taking place, and there have been dips throughout the bull-run in all metals.

"But we've not seen a major kicking -- copper goes back a few hundred dollars and it is just a buying opportunity and the shorts get burnt," a floor trader said.

On Monday, copper was around $7,500 a tonne, a $155 decline from Friday.

COPPER THE FULCRUM

Analysts pinpointed copper as the key metal that will drive a future reaction throughout the LME complex.

"Copper is vulnerable to a $2,000 correction, as there is little significant support built up. The parabolic trend on copper is almost vertical now," Green noted.

"I think we are actually very close to a peak, time-wise, if not price-wise. This type of action is the prelude to a major correction -- when that occurs is the $64,000 question," he added.

Copper's RSI (Relative Strength Index), an important momentum reading, is now 78 percent. Readings in the 70 to 80 percent denote an overbought market, while 20 to 30 percent is oversold.

However, copper's RSI has been higher -- last week it reached 81 percent and recorded a level of 86 percent in April. RSIs on other metals are strong, but not critical.

Zinc is at 67 percent, but reached 86 last month, and was as high as 93 in January. Nickel and aluminium are both near 66 percent, but have been in the mid-80 percent area this year.

"Diverging short-term moving averages (MAs) suggest the market (aluminium) has the potential to move higher," Angus MacMillan, minerals strategist at Bache Financial, said.

Aluminium was around $2,870 on Monday, some $165 down from Friday, having hit an 18-year high of $2,945.

The short-term MAs are 10- and 30-day indicators, and as well as aluminium, both zinc and nickel are diverging and moving upwards -- a favourable trend.

Coincidentally, a couple of months ago this website was reporting that attempts to short the copper market was running foul of Murphy's Law:

Murphy’s Law continues to bedevil the poor souls who elected to play copper short in a bull market. After sideways consolidating for the month of February with a corresponding attempted rollover in weekly momentum, the copper chart was beginning to look ripe for a short-term sell technically speaking. However, before a break could occur, political trouble and bloodshed in Indonesia impacting Freeport McMoRan’s Grasberg copper/gold mine (and others) lit a new fire underneath the metal. It is mentioned here only as a reminder to bears in gold (especially in gold mining shares) to take the continuous caveat of global political and religious tensions seriously. Just when it looked like the copper shorts had a decent chance for at least a typical pullback, up jumped Mr. Murphy.

Believe it or not, even with copper trading, as one trader puts it, “in the ice crystals of the atmosphere,” the large commercials were not willing make a stronger short case even after the month-long consolidation. As shown in the nearly balanced CFTC positions of traders on copper leading up to this week, none of the usual suspects had taken a strong collective position on the red metal either way until just this past Tuesday. Apparently, copper above $2.35 per pound was enough for the LCs to begin layering in short positions enough to register firmly on the net-short side … again. “If at first you don’t succeed…”

What is really interesting about that last site is the link to the "positions of traders". This is the chart (click on it to enlarge, and don't worry -- it won't take you to a pharmaceutical sales pitch):


I have no way of assessing the credibility of the data, but if it is true, it shows large speculators bailing out of the market over the recent past just as small speculators are pouring in: a classic strong hands to weak hands baton pass that ends in a market drop.

All that said, Birinyi Associates cautions against metal stocks caution.