Copper Broke Lower As Expected

COPPER TODAY – Further upside capped by DTL off September 2015 high

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By Andy Farida, andy.farida@fastmarkets.com +44 (0)1722 439411
Short term: Down
Medium term: Up
Long term: Down
Resistances:
R1 4889 September high
R2 5032 July high
R3 5091 April high
R4 5131 March high
R5 5358 October 2015 high
Support:
S1 4782 20 DMA
S2 4761 50 DMA
S3 4631 April low
S4 4492 78.6% Fibo Jan low to March high
S5 4483.50 June low
S6 4430 February low
S7 4318 Low so far
Legend:
DMA = Daily moving average

Fibo = Fibonacci retracement level

RSI = Relative strength index

H&S = head-and-shoulder formation

Image

Analysis

  • The zoomed-out daily chart continues to show a very subdued rally that is capped by the DTL off the September 2015 high. This has acted as a strong ceiling, stopping the advance in copper prices beyond the thin red line.
  • Bulls have tried to break above it on numerous occasions and it seems that it will continue to erode. If a break higher materialises, the move will be a very powerful one. But copper prices will be damaged buy a break below the DTL off the January low.
  • The prevailing price structure as well as the technical indicators resemble the set-up of the May sell-off (see daily chart). Should we see a repeat, copper prices could fall – the daily RSI is already treading lower, followed by the weakening stochastic lines.
  • Meanwhile, nearby support comes from the 20 DMA and then the 50 and 100 DMAs.

Macro drivers

With China away on a week-long national holiday, the base metals seem to have stalled and lack the impetus to break higher. As well, better-than-expected economic data out of the US has firmed the dollar, further raising the probability of a rate rise as early as November. An in crease could affect access to cheap finance and raise the cost of financing. Against such as backdrop, base metals might continue to consolidate lower.

Copper’s net long fund position is seeing big shift while money managers grow more confident about being bullish. Fresh buying has outpaced selling at 7,953 lots and 4,628 lots respectively for a rise in the NLFP to 41,995 lots. At the current rate, it has the previous high at 48,190 lots in it sights.

A well-supplied market and readily available secondary material are forcing physical premiums lower in the US. “We have cathode to sell but no one is paying even 5.5 cents,” one US market participant said. In Asia, premiums are unchanged.

Sporadic large inflows to Asian LME-listed warehouses have kept total LME stocks elevated at 359,725 tonnes. Available stocks edged slightly higher to 283,425 tonnes. With no dominant warrant holder, the contango in the c/3s has widened to $21.25 – lending capacity is far more relaxed.

Conclusion

Copper is consolidating again after finding fresh supply from the DTL off the September 2015 high. For bulls to advance, this resistance needs to be broken. Otherwise, there is a risk of a retest of the January low UTL.

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.

 

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NICKEL TODAY – Bear flag triggered – more price weakness possible

12th September, 2016 10:54 AM by

Short Term:
Medium Term:
Long Term:
Resistances:
R1 9145 June high
R2 9480 March high
R3 10785 October 2015 high
R4 10119 20 DMA
R5 10302 50 DMA
R6 10900 Current high
Support:
S1 9601 100 DMA
S2 9700 May high
S3 8245 April low
S4 8100 January low
S5 7550 February low
Stochastics:
Legend:UTL = Uptrend line

DTL = Downtrend line

Fibo = Fibonacci retracement level

RSI = Relative strength index

DMA = Daily moving average

H&S = Head-and-shoulder pattern

Technical Comment

Analysis

  • Nickel consolidated higher but found overhead resistance after retracing 50 percent of the recent sell-off.
  • This is a key technical rejection, followed by the break below the confirmed bear flag formation.
  • The overall structure in the short term remains bearish and we cannot rule out an AB = CD move (see daily chart).
  • The daily RSI has already touched the DTL and turned lower again, confirming that this is strong technical resistance.
  • Meanwhile, the stochastic lines are getting set up for further price weakness – selling interest has picked up.

Macro drivers

The Asian market is set to remain rather quiet this week, with holidays in Malaysia, Indonesia and Singapore for Hari Raya Haji and then in China and Taiwan for the mid-Autumn festival. Chinese industrial production is due tomorrow; this should offer market participants further clues on how well the world’s second-largest economy is performing. The global equity market seems to have finally got the memo that there is quite a high possibility of the US raising rates this month. The January-February sell-off after the December 2015 rate increase is fresh in the memory. Still, the equity sell-off may well be profit taking that reflects seasonal weakness rather than a market correction as many feared. After all, global central banks are in this together and have a shared interest in provide sufficient and necessary easing to maintain a cohesive global recovery.

Nickel’s net long fund position (NLFP) has been rather resilient but remains vulnerable to profit taking. After a strong run, the NLFP appears to be plateauing – perhaps money managers are reassessing their positions. The recent price weakness may prompt further liquidation and could persuade short sellers to build their positions. We await the next NLFP update for confirmation.

Shorts are concentrated in the September contract, with four entities collectively holding a minimum 35 percent of the open interest. There are three entities holding longs but only at 15 percent – this is not enough to cover if shorts roll over their positions. Tightness is showing up in the nearby spreads – the contango in the c/3s at $44.25 is down from $55.00 at the start of last week. The presence of a dominant warrant holder at 30-39 percent could tighten the spreads further if the metal is in tight hands.

A narrowing contango in the c/3s is also attracting some metal back to LME-listed warehouses. There is two-way flow, with 546 tonnes arriving and 726 tonnes of outflow but LME stocks for the year is still lower on net. They peaked at January 2016 at 450,000 tonnes and now total 367,752 tonnes while available stocks are at 245,730 tonnes. With no immediate sign of a reversal in the LME stocks, the declining trend may well provide some price support.

Other development

Regina Lopez, the environmental and natural resources secretary of the Philippines, suggested in her latest commentary that “there will absolutely be more suspensions due to environmental reasons” – 10 mines have already been suspended since the start of the audit, with the newly elected Philippine government determined to raise mining standards.

There has been some talk that Indonesia may temporarily relax its ban on the export of nickel ores for those companies that are at advanced stages of building downstream NPI capacity but that need to raise money to finance the projects. Since nickel prices have continued to rebound despite this possibility, the market does not seem to expect much to come of it. In a way, Indonesian nickel miners have already suffered more than two-and-a-half years of pain since the ban was introduced and are only now starting to benefit from exporting NPI so it seems counter-productive to turn on the ore export taps again.

Conclusion

Prices remain in an uptrend after nickel maintained higher highs and lows since the start of 2016. The nickel market swung to a deficit of 21,200 tonnes in the first five months of 2016, the latest INSG figures show. If this trend continues, it should underpin nickel prices and potentially set up further rallies.

But we foresee near-term price weakness due to several factors:

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.

Chart Rules

Here are some of the simple steps used to analyse the market:

Monthly Chart

  1. Start with a Monthly chart to identify the larger trends and identify key swing points
  2. Swing points are marked with a horizontal red lines

Weekly Chart

  1. Start with the weekly chart and use it to confirm the monthly trend
  2. Identify the weekly swing points – this will be marked in green lines

Daily Chart

  1. Drill into the daily chart to better help understand potential risk / reward and create a bias
  2. Identify the key weekly and monthly swing points
  3. Marked daily swing points with blue lines
  4. Use Fibo retracement levels and understand the current wave using Elliot Wave Theory

4 hour Chart

  1. Place entry / exit and stops