By : David Scutt, Market Analyst
- A short- squeeze has sent COMEX copper to fresh contract highs
- Despite the bullish headlines, the price action suggests bears with deep pockets are lurking above $5
- With momentum waning, near-term downside risks are growing
COMEX copper surges to fresh highs on short squeeze
The upside in copper flagged last week has played out nicely, delivering a fresh contract high for the red metal on COMEX futures. While I remain a bull longer-term, the price action over the latter parts of this week has not been convincing, warning of growing near-term downside risk.
Bloomberg has written an excellent article explaining the fundamental factors behind copper’s hot streak on COMEX. Basically, a premium had opened up between COMEX futures and futures listed on other exchanges around the world, seeing a cohort of investors short the COMEX contract looking for the premium to be erased.
Unfortunately for them, such was the bullish case for copper from a technical and fundamental perspective, bulls kept buying, eventually forcing the shorts to cover their positions given mounting mark-to-market losses. A short squeeze, in other words. That explains the price action seen earlier this week when COMEX copper surged to contract highs on the back of volumes not seen since November 10, 2016, two days after Donald Trump’s victory in the Presidential Election.
Maybe there was element of geopolitics underpinning the move, coinciding with Joe Biden announcing a raft of tariffs on Chinese manufactured green energy goods on the same day, but it did come across as a good old-fashioned short squeeze.
However, as we’ve seen with squeezes in other commodities such as cocoa recently, often these moves don’t last. And one look at the daily chart of COMEX copper does not fill you with confidence that this episode will be any different.
Click the website link below to get our exclusive Guide to gold trading in Q2 2024.
Big topside wicks on the daily chart warn of downside risks
Just look at the huge topside wicks over the past three session, indicating that bears are winning the battle for near-term supremacy despite huge volumes going through. From a momentum perspective, you can’t help but notice there’s been divergence between RSI and price, with the former recording a lower high even as the latter surged to record contract highs. Combined, it comes across as toppy and prone to snowball-like risks should profit-taking kick in.
Should we see any further moves back towards $5, it presents an opportunity to join with the bears seeking downside, allowing for a tight stop to be placed above the level for protection. Possible downside targets include $4.82 – where the price bounced from on Wednesday – with $4.695 the next after that.
Given the nature of the price action over recent weeks, if you’re contemplating shorting now, ensure you keep your stops close to entry point. The whippy price movements point to this trade being a low probability setup despite the obvious price signals.
– Written by David Scutt
Follow David on Twitter @scutty
From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.