Copper Has More To Lose After ‘Evergrande Crunch’

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has lost 16% from this year’s record highs, recoiling from the debt crisis at China’s property developer Evergrande as well as Beijing’s determination to use stockpiles of the metal—rather than pricey imports—to control inflation.

With prices settling at $4.115 per pound on New York’s COMEX on Monday versus the all-time peak of $4.888 on May 10, the obvious question to ask is has copper bottomed for the year? Is it a screaming buy or has it more to lose?

The answer— based on technical charts as well as China’s insidious campaign to weaken the metal’s price through fewer imports—suggest it could go deeper into red territory. 

To be sure, those wanting to build new long positions could make some profit at these levels.

But a sweeter spot below $4 awaits those willing to be more patient to see a deeper shakeout in the metal, says Sunil Kumar Dixit of SK Charting in Kolkata, India.

Copper Weekly

All charts courtesy of SK Charting

“Copper is undergoing both price and time correction,” said Dixit.

“Prices are very likely to test the 50-week Exponential Moving Average of $3.9877 and break below previous month low of $3.9590.”

COMEX copper is already down 5.4% for September, extending the 2.3% drop in August.

In Tuesday’s Asian trading, it gained a modest one cent, or 0.3%, to $4.14. 

The slow recovery exhibited the depth of the inflation concerns baked into the market, said Sebastien Galy, a senior macro strategist at Nordea Investment Funds SA.

“It is taking the market more time to price in these shocks than I had expected, and the market is far more realistic as the buy-on-dip mentality fades with the fear of inflation,” Galy said in comments carried by Bloomberg on Monday. Adding:

“The edges of the bullish narrative cover are being pulled and the darker underlying reality is coming to the fore.”

Monday’s tumble in copper came amid the growing debt crisis at Evergrande, which has been struggling to meet interest payments on its debts as it begins repaying investors in its wealth management business with property. The saga has become an indicator of China’s new growth path and is being closely tracked by investors for fears of contagion.

Adding to the already bearish Evergrande sentiment were remarks over the weekend from China’s Premier Li, who said Beijing will use “market tools” to stabilise commodity prices. That appeared to be a coded message for the release of more oil and metals supplies from stockpiles versus pricey imports.

Copper Monthly

Breaking down copper’s technicals, Dixit said the long-term monthly chart showed the previous month’s candle closing with a bearish engulfing pattern extended by the current month.

He added:

“A sustained move below $3.9590 may push COMEX copper to the 23.6% level of Fibonacci retracement measured from the March 2020 low of $1.9700 to the May 2021 high of $4.8845. This could extend the losses to the static horizontal support of $3.7700, which also happens to be the 38.2% Fibonacci level.”

“In the event of an accelerated sell off below this point, the critical 50% Fibonacci level $3.4272 will act as the turning point.”

Copper Daily

For copper bulls, Dixit said the oversold Stochastic RSI on the daily chart reads at 10/8. This could cause an upward swing to $4.30, which would be a confluence of the middle Bollinger Band and 50-EMA. It could also extend a recovery to the 100 Simple Moving Average of $4.35.

Yet, the more influential Stochastic RSI on the weekly chart had a negative cross over with a 55/65 reading, while the monthly chart’s Stochastic lines were positioned below RSI with bearish footprints, Dixit said.

“This only indicates bearish correction ahead,” he said.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.

Source: Investing.com Canada

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