Copper’s Ship Is Leaning

 | Mar 19, 2014 01:32PM ET

Copper futures are lower by 11.6% ytd and the most recent leg has caused prices to implode 7.7% just in the last two weeks. May futures traded to their lowest level in almost four years intra-day before a sharp reversal that currently has copper nearly a dime off their intra-day lows. Most of the depreciation of late can be attributed to concerns on the Chinese economy and the drop in the yuan. The fear investors have is the drop in the yuan will force Chinese manufacturers to cut back on the amount of raw material i.e copper they import. ECON 101-- the weaker yuan must be converted to dollars to bring in commodities from abroad and this weaker currency reduces their buying power. Why China matters in terms of copper pricing is they account for roughly 40% of global demand.

Watch For The Bounce

The drop in cropper has been making headlines. In my eyes the ship is leaning too hard one way and I would suggest a line in the sand is being drawn near current lows and we get a bounce from current levels. I will not take a trade in copper but I will use the anticipated movement to guide my clients with entry and exit in other instruments. As you can see on the chart below I have established Fibonacci levels and also a down sloping trend line just above the $315 level in May futures. I think in the coming weeks futures bounce to that level.