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The price of copper has been staging an impressive recovery this month and is breaking its correlation with other precious metals. The breakout is due to improved market sentiment towards the global economy.
Traditionally, the copper market is seen as a bellwether for economic growth because of the metal’s central role in construction, wiring and electronic goods. Copper could be rallying in expectation of the new “green economy”.
Inflation is another big reason why copper price appreciation is happening; this has been a common theme with many commodities this year. Supply is another factor in play pushing copper prices higher.
The copper market is so tight that spot contracts traded at the biggest premium over futures in at least 27 years in London. Dwindling global supplies and a widening price gap between cash prices and contracts for future delivery signal that buyers are accelerating efforts to lock in supplies.
The spread between cash and three-month futures surged to over $1,000 a ton on the London Metal Exchange on Monday, a premium not seen since at least 1994. The spread has been widening since early October as demand outpaced supply amid dwindling global exchange inventories.
Technical analysis is pointing towards the $600.00 level as a possible price target if a breakout above $500.00 takes hold. This is something that I have been expecting to happen for sometime.
Sentiment towards copper has been the biggest risk in the market over recent months as the market turned heavily bullish towards the red metal. The herd has now flipped to net bearish, which suggests more gains are now possible.
According to the ActivTrader platform some 57 percent of traders are bearish towards copper. With the current sentiment bias towards copper, I believe more gains in the red metal remains the most likely scenario.
Copper Short-term Technical Analysis
The four-hour time frame shows that copper is creating bullish higher highs and lower lows and has broken above all forms of meaningful short-term technical resistance.
It is also noteworthy that the $500.00 resistance level is a big psychological barrier that needs to be broken to accelerate the breakout momentum in the red metal.
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Copper Medium-term Technical Analysis
The larger picture for copper prices remains extremely bullish due to the presence of a massive inverted head and shoulders pattern that holds a substantial upside price target.
I am encouraged by the fact that a large inverted head and shoulders pattern with $100.00 of upside potential has officially formed. A break above the $500.00 is pointing to a price ramp towards the $600.00 level.
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