Upside In Copper & Latin America?

Copper and Latin American equities have been a dismal place to be so far this year, and for many years at that, but current conditions suggest that we may be ready to see a bit of a mean reversion in the short term.

What sparked this thesis was the fact that many of the correlated markets like Brazil, Colombia, etc… have hit their downside targets. That in and of itself stops us from being short and instead has us looking for opportunities on the long side if they present themselves.

From a seasonal perspective, we know that September and October are the two worst months of the year for Copper. Also, public sentiment remains bearish, but is slowly moving off extremes into more neutral territory. Commercial hedgers however, continue to maintain a net long position near multi-year highs, which suggests that they’re looking for higher prices. Given the mixed signals we’re seeing from these metrics, let’s see what price is telling us.

Structurally, Copper remains in a downtrend, however prices have begun forming a bit of a base below the ’07 lows which we broke down below in July. With a few hammer candles sporting long tails, as well as momentum diverging positively, the possibility of a failed breakdown looks pretty good.

chartOn the daily chart we can see prices have been capped by one downtrend line since late May, and another accelerated trend line since early July. In the middle of August prices made new lows as momentum positively diverged. Recently prices have broken back above the prior low, as well as the accelerated downtrend line to confirm a false breakdown. With prices holding above this 2.28 level and testing this major downtrend line, the bulls have a decent shot at a breakout for a mean reversion back toward the 200 day at 2.65.

chartFrom an intraday perspective, we can see the base that prices have formed on the hourly chart, which has allowed the 200 period moving average to start rising. This combined with momentum being in a bullish range gives the tailwind they need to create a sustainable move to the upside. Bulls want to see prices clear resistance around 2.34 to confirm a breakout from this symmetrical triangle.

chartThe Bottom Line: After a few months of getting taken to the woodshed, there finally seems to be a reason to tactically look at Copper on the long side. Aggressive longs can own it here against the prior low of 2.28, or you can wait for a breakout above this downtrend line if you’d rather wait for confirmation. With prices 13% below the 200 day (2.65), I’d say that’s probably an area I’d look for as an ultimate target. If prices really get going and get comfortably back above the ’07 lows on the weekly, we could see a test of the accelerated trendline which sits around 2.80, but we’ll cross that bridge when we get to it.

For equity folks that don’t trade commodity futures, take a look at ETFs like $EWZ (Brazil), $ILF (Latin America), $GXG (Colombia), $EPU (Peru), $ECH (Chile), and $EWW (Mexico) that are likely to benefit from Copper strength, as they’re highly correlated (> .70) on a monthly, quarterly, and yearly basis. There is an ETF for Copper (JJC), but the spreads are likely to be wide as there isn’t much liquidity as avg daily volume has been roughly 22k over the past three months or so.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.