It’s About To Get Wild In The Copper Market!
No doubt about it, if you’ve been following the copper market over the past few months, you’ve probably been twiddling your thumbs. The price action for the red metal has been a bit on the boring side.
In fact, copper’s done nothing but trade in a tight range between $3.53 and $3.75 since mid-December 2012. Of course, that’s not really surprising given the amount of uncertainty in the marketplace lately. The Fiscal Cliff fiasco, along with Chinese economic growth worries, has kept copper bulls at bay.
But now things are starting to change…
The Fiscal Cliff is taken care of (for now) and Chinese economic growth numbers are gaining steam. In fact, economists are now suggesting Chinese economic growth will stabilize around 8% in 2013. And remember, China accounts for around 40% of global refined copper demand.
And that’s just the start of it. The tight range bound trading pattern copper’s been stuck in over the past few months is leading to a very interesting technical situation.
Take a look…
As you can see, copper is consolidating into a nearly perfect triangle pattern (blue lines). In case you’re unaware, triangle patterns can lead to explosive price appreciation once triggered.
Let me explain…
Notice how the price of copper has slowly compressed into a tighter range over the past few months. This occurs because investors are increasingly uncertain of where the copper market is heading. As a result, volatility in the copper market has severely diminished over the past few months.
But as any technical analyst will tell you, volatility is mean reverting. In other words, periods of low volatility are replaced by periods of normal to high volatility. Over time, volatility always returns to an average, or mean.
And the cool thing is, triangle patterns are an outstanding clue that volatility is about to return.
Let me give you an example. Take a look at this silver chart from 2010…
Notice how silver consolidated into an increasingly tight range from May to mid-August. Investors were increasingly unsure about silver and as a result, the volatility contracted.
But most importantly, notice how silver surged once the triangle pattern was triggered in late August.
And now the same technical pattern is playing out in copper…
If copper can break firmly above $3.75 a pound in coming weeks, it’s highly likely the price of the red metal will continue rising to the $4.50 area… all time highs.
Are the fundamentals there to support such a rise in copper?
Absolutely…
Remember the strong Chinese economic growth numbers I mentioned a minute ago? Turns out China imported a record amount of copper in November 2012.
And that’s not the only bullish factor for the red metal…
The US housing market is quickly gaining steam. As a matter of fact, the most recent Case/Shiller Home Price Index reports US home prices rose by 5% year-over-year. That’s the quickest advance in housing prices since the bubble days of 2006!
Clearly, US housing demand is coming back with a vengeance. And since copper is used heavily in the manufacture of new homes, global copper supplies will likely come under pressure in 2013.
How do you capitalize on a looming copper rally?
One way is through the iPath DJ-UBS Copper ETN (JJC), which tracks the day-to-day moves in copper futures.
But perhaps the best way to play rising copper prices is through Freeport-McMoran (FCX). Shares of this copper miner took a beating recently due to their buyout of McMoran Exploration (MMR).
But now that the stock is trading at just 7x forward earnings, it’s a solid bet on higher copper prices!
Until Next Time,
Justin Bennett
Category: Commodities
