The price of copper pulled back towards a two-month low yesterday after news reports coming from China suggested that the authorities in the world’s second-largest economy could be about to take serious measures to curb the recent price rally in commodities.
Market participants sold the red metal amidst fears that China is about to release state reserves of copper, aluminium and zinc into the system, and trim buy positioning to further harm speculative activities in the commodity space.
PPI inflation numbers in China recently hit their highest level in twelve years, which sparked fears amongst Chinese officials that commodities could be set to explode further to the upside. Yesterday’s decline also happened just one day ahead of the FOMC rate decision.
I am cynical towards the recent price plunge in copper, as it could be just a major price squeeze to shake out positions ahead of the United States central bank’s policy address, which looks to be significant for the ongoing uptrend in commodities.
Most economists believe that the price of copper could surge if the Federal Reserve fails to sound the alarm of rising inflation and continue to sweep it under the carpet as just being transitory.
The retail sentiment is also supporting the thesis that a major long shake-out could have just taken place. According to the ActivTrader platform, some 88 percent of traders are bullish towards copper.
With the sentiment bias at very extreme levels, I have serious concerns in the short-term. We may need to see sentiment neutralize before copper can start to rally again.
Copper Short-term Technical Analysis
The four-hour time frame shows that a large head and shoulders pattern appears has broken to the downside, following yesterday major drop decline in the price of copper.
According to the overall size of this typically bearish price pattern copper could stage a $60 directional move to the downside, taking the red metal below the $400 level.
Overall, I would wait and see what the FED actually say as this is likely to determine the next $60.00 price move in copper.
Copper Medium-term Technical Analysis
The larger picture for copper prices remains very bullish, and continues to show a massive inverted head and shoulders pattern on the weekly time frame, which remains triggered while the price trades above the $400.00 level.
According to the overall size of the bullish reversal pattern, copper prices could rise still towards the $600.00 level over the medium to long-term before a meaningful correcttion takes place.