MNI MARKETS ANALYSIS - Is the Copper Rally Over?

COPPER TECHS: Is The Rally Over? A Look At The 50-Day EMA

Copper is under pressure today.

• A downtrend has been in place since May 10 when the commodity stalled at $488.80.
• The month-long downleg is likely a correction within a broader uptrend. However, today's sell-off has resulted in the break of the 50-day EMA.
• The 50-day EMA highlights a strong area of support in an uptrend, and levels below the EMA also highlight an area where demand potentially exists, assuming sentiment remains bullish.
• The chart below displays a number of instances, since March 2020, where a corrective pullback found support either below the 50-day EMA or just ahead of it.
• Price is currently trading below the 50-day EMA.
• The break lower reinforces the current bearish risk however, any signs of a base near-term could represent an early reversal signal. This would suggest the end of the correction and an early resumption of the broader uptrend.
• An extension lower though would expose three key support levels:
  • SUP 1: 423.62 - Trendline support drawn off the Oct 2, 2020 low
  • SUP 2: 394.19 - Trendline support drawn off the Mar 19, 2020 low
  • SUP 3: 384.90 - Mar 4 low
• Currently, while the moving average overview remains in a bull-mode and price trades above both trendline supports, the current bear cycle is considered a correction. A change in the EMA set-up and a breach of trendline supports however, would alter the picture.

Is The Rally on Copper Over?

• In the past few months, we have seen that Chinese 'liquidity' has been contracting sharply, increasing investors' concern over the sustainability of the current market rally, especially in risky assets.
• Interestingly, the Li Keqiang Index, which is an economic measurement index that tracks China's economy using three indicators - railway cargo volume, electricity consumption and loans disbursed by banks - seems to also have peaked in February this year, which corresponds to the high reach in Chinese equities (CSI 300 Index is down 12% from its high reached in mid-February).
• It is very common that macro economists have their in-house measures that track Chinese economic activity as the GDP and industrial production numbers have often been criticized.
• This chart shows that the Li Keqiang Index has generally led copper prices by 6 months in the past 15 years (Index inception).

Source: Bloomberg/MNI

Copper Net Specs: Smart Money Is Following Chinese Liquidity

• Net specs positions on copper have significantly fallen since the start of the year as investors are worried that the global reopening will not be enough to offset the contraction in Chinese 'liquidity', which we define as the annual change in Total Social Financing (TSF) 12M sum.
• 'Smart money' investors seem to follow China liquidity and therefore have been reducing their exposition to risky assets in recent months.
• This chart shows how strongly China YoY change in liquidity has co-moved with copper net specs position in the past 7 years.

Source: Bloomberg/MNI