Copper Hanging In There Above Support – iPath DJ-UBS Copper Total Return Sub-Index ETN (NYSEARCA:JJC)

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Copper is a metal that most market participants watch, but few trade. The red metal is essential when it comes to infrastructure building. The most liquid market for copper trading is on the London Metals Exchange which offers contracts that settle every business day. The benchmark copper price on the LME is the 90-forward contract. Therefore, producer and consumers tend to use the LME contracts for hedging purposes because of the ease of making and taking delivery of the nonferrous metal.

The other liquid market for copper trading is at the COMEX division of the Chicago Mercantile Exchange. Copper on COMEX is a typical futures contract, and while it offers market participants the ability to make or take delivery, the mechanism exists during the delivery period for contracts which settle most liquidly in March, May, July, September, and December each year.

Copper also trades on exchanges in Asia, but the two most popular markets are on the LME and COMEX. The LME contract calls for 25 metric tons of the metal and is priced in dollars per ton. The COMEX contract is for 25,000 pounds and is priced in cents per pound.

A bull market since January 2016

The price of copper has been rising since finding a bottom in January 2016 at $1.9355 per pound on the nearby COMEX futures contract.

Source: CQG

As the monthly chart highlights, copper reached an all-time high seven years ago in February 2011 at $4.6495 per pound. Before 2005, the red metal had never traded above the $1.6065 per pound level.

Copper took the elevator to the downside following the global financial crisis in 2008 reaching a low of $1.2475 per pound. However, following the 2011 peak price, the industrial metal has remained above its 2005 high at just under $1.61 per pound. Since January 2016, when the price dipped below $2 per pound, copper has been making higher highs, and higher lows and that price action took it to its most recent high at $3.3220 in late December 2017.

Higher lows remain intact

Copper has been an almost picture-perfect bull market for more than two years since rejecting lows in January 2016

Source: CQG

As the weekly chart illustrates, COMEX copper futures bounced from the lows in January 2016, and after a ten-month period of price consolidation, it broke to the upside reaching almost $2.74 per pound in November 2016. The red metal made a new high in February 2017 at $2.8230, and after a pullback that took it to a low of $2.47 it powered higher surpassing the $3 per pound level for the first time since 2014 last August. The most recent high came at the end of 2017, and since then copper has been trading in a range from lows of $3.0260 to highs of just over $3.30 in 2018. The current level of technical support stands at $3.0260 per pound, and below there the critical line in the sand for the bull market in the base metal is at the early December 2017 bottom at $2.9205.

Copper is a bellwether metal

Doctor copper is a metal that tends to diagnose the economic health of the world. Copper prices tend to rise during periods of economic expansion and fall during times when conditions are contracting. Perhaps the most dramatic example was the move to the downside in 2008 as the global financial crisis took the red metal from $4.2160 in May 2008 to lows of $1.2475 in December of the same year. As a barometer of economic conditions, copper reflected the overall environment around the globe.

There are three reasons copper has been moving to the upside since finding a bottom and rejecting prices below the $2 per pound level early 2016. The first reason is that after almost a decade of historically low interest rates and monetary policy that stimulate economic conditions, the business environment improved, and copper’s price reflected the increase in business activity. The second reason is that China, the world’s most populous nation and leading consumer of the red metal, unleashed its “new normal” under President Xi which has tempered growth expectations. Meanwhile, Chinese infrastructure building continues to underpin demand for copper and other industrial raw materials. At the same time, President Xi’s plans to combat pollution means less metal smelting and refining in the Asian nation which will result in more imports of all raw materials from abroad, including copper.

Finally, on the campaign trail, President Trump pledged to rebuild the crumbling infrastructure of the United States. After a legislative victory when it comes to tax reform in late 2017, the prospects for a package that rebuilds the roads, bridges, tunnels, airports, and other parts of U.S. infrastructure over coming years has increased. Copper is a construction staple, and the prospects of a $1.5 trillion package in the United States will increase the demand for the red metal.

Demand is rising, and supplies may not be able to keep up

With smelting and refining activities in China declining, it is possible that supplies of copper around the world will not be sufficient to meet global demand over coming months and years. Inventories of copper on the London Metal Exchange have been declining since 2013.

Source: LME

As the chart shows, LME stocks were at around the 670,000-ton level in 2013 and dropped to 321,450 tons as of March 16. LME stocks have not been above the 400,000-ton level since 2014. The decline in inventories is a sign of demand for the base metal.

With the Chinese economy showing signs of strength, the U.S. growing at over 3%, and Europe emerging from its economic malaise, copper demand around the world is booming, and the market has become tighter leading to higher prices.

$4 possible in 2019

Copper has rallied appreciably since January 2016. However, the rally has been slow and steady with plenty of periods where the price experienced long periods of price consolidation. After reaching the most recent peak at the end of 2017, the red metal is once again undergoing a period of consolidation, but so far it has held above the $3 per pound level.

Economic growth has supported the price of the industrial commodity over the past two years, and since January 2017, the move to the downside in the U.S. dollar has been another supportive factor for the price of copper. The dollar index rose to its highest level since 2002 in January 2017, but it has declined to under 90 and remains a lot closer to lows than last year’s peak for the greenback. The historical inverse relationship between the dollar and commodities prices is yet another reason for strength in the price of copper.

If the dollar continues to decline in value and economic growth increases over the months ahead, we are likely to see more demand for copper leading to another higher high. The last time copper traded above the $4 per pound level was back in 2011, and there are lots of levels of technical resistance on the way back to that lofty level.

If copper rises above the December 2017 peak at $3.3220 per pound, the next level it will face is at $3.4445 the December 2013 high. Above there, $3.8520 was the September 2012 peak, and $3.9895 was the high for that year. Above there, the next levels of technical resistance stand above the $4.50 per pound level.

While the COMEX futures market offers futures and options contracts, the iPath Bloomberg Copper SubTR ETN (NYSEARCA:JJC) does a reasonable job replicating the price action in the copper futures market

Source: CQG

JJC has traded in a range from $17.97 to $61.69 since 2007 and was trading at the $34.84 level on Monday, March 19. Barclays will delist JJC and replace the ETN with JJCB in April, but I would wait until JJCB builds critical mass when it comes to net assets and volume before using the new instrument. JJC still has net assets of over $71 million and trades an average of over 65,000 shares each day.

Copper’s ascent has been slow and steady and every dip for over two years has been a buying opportunity. I believe that the red metal continues to be a buy on price weakness, and with copper trading at $3.0850 on March 19, it is currently in another in a long series of consolidation periods. Copper is hanging in there above support and the metal reflects the health of the global economy. These days many signs are telling is that the prospect for more price appreciation in copper in the month ahead are strong, and building a long position on weakness could be the optimal way to approach the red metal when it comes to both trading and investing.

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Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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