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The price of copper has staged a strong pullback in recent days as the metals space comes under early year selling pressure after previously starting the month of January in a positive fashion. Copper has lost nearly $20.00 from the highs of last week, placing the metal in a vulnerable technical position.
Consensus theory suggests that copper price is falling due to global lockdowns amidst the spread of new variants of the COVID-19 virus. A similar pattern happened in metal prices last year when many countries went into lockdown.
Additionally, the red metal is supposedly selling off due to new COVID-19 infections and lockdowns being placed on some Chinese cities. A huge amount demand for copper comes from China and Asia, so this is a developing story that could start to weigh on copper prices.
Then we have to consider the US dollar component into why copper prices are falling. The US dollar is starting gain traction over stimulus hopes, and a safe haven bid as more countries go into lockdown.
Again, this was a similar theme in financial market last year when the COVID-19 disease was first discovered in Wuhan, China, and started to spread overseas. So, this is likely to remain the playbook while the virus is starting to spread again, especially in Asia.
A slowdown in global economic activity in China would be very detrimental for copper prices at this stage, as the Chinese economy was the only development nation to post positive growth figures last year and remains the primary engine of economic growth at the start of 2021.
Conventional wisdom also suggests that if gold and silver prices are falling then copper will tag along. There is not a hard rule, but it seems more likely than not if we factor in past performance.
Copper Sentiment Analysis
Market sentiment data on the ActivTrader platform currently shows that some 65 percent of traders are bearish towards copper right now. This is not an extreme reading, but it does indicate that the crowd has started to sell copper.
Source by ActivTrader.
What I find interesting is that nearly 78 percent of traders are bullish towards silver. Such a one-way skew is rarely a good thing, and could mean that metals such as silver, and copper, could weaken further.
Market sentiment can be a great tool to incorporate into your trading, especially when the crowd is leaning heavily in one direction, and the price is moving in the other direction.
Source by ActivTrader.
Copper Technical Analysis
Perhaps the most striking feature on the copper chart right now is the bearish price divergence on the lower time frames which extends down towards the $320.00 level. This negative divergence could easily being unwound if selling pressure continues.
Source by ActivTrader.
Traders should also note that a head and shoulders pattern is present on the lower time frames, and a decline below the $345.00 level will activate the bearish price pattern and potentially reverse the mentioned price divergence.
Source by ActivTrader.
On the daily time frame the 20-day moving average is offering strong support and have been instrumental in holding price dips since November. A loss of the 20-day MA, around the $350.00 area could cause heavy technical selling towards the 100-day MA, at $305.00.
