Copper has suffered a painful decline of more than 30% since May:
Copper (Daily)
Meanwhile bearish sentiment has continued to grow stronger as price has fallen farther. However, there are some very good reasons why it may be time to step in and bet that the copper sell-off is overdone:
- Commercial traders in copper futures are currently holding the largest net long position since August (a ~15% bounce ensued) as hedge funds and CTAs (managed money) are holding the largest net short position since April 2013
When commercials move to extreme net short/long positions, such as we are currently witnessing, they have a strong track record of getting it right.
- Copper is now below the 90th percentile of industry cash costs ($2.16/lb). Historically when price has fallen below this level it has rebounded quickly:
- We are within days of one of the strongest seasonal patterns in the entire commodities complex
Copper has a strong tendency to bottom in mid-December and rally all the way through May. This seasonal pattern is powerful and is based on more than 40 years of futures data, however, it must bet noted that this seasonal trade has not worked since 2011.
From a technical vantage point a rally back up to at least the previous area of support near $2.25 seems reasonable and a trader could use a daily close below $1.95 (5% below the current price) as a stop-loss reference point.