Copper’s Surge Risks Losing Steam as Technicals Signal Caution

(Bloomberg) -- Copper’s technical readings are flashing warning signs that it’s storming rally could be coming to an end.

The metal surged about 50% from a March low, recouping its pandemic-driven losses, as disruptions at key producers in South America coincided with surging demand in China as the country’s economic recovery gathers pace.

Investors are now looking at the longevity of the rally, with some speculating that bullish factors have been priced in and questioning whether copper prices can hold up as the virus continues to spread in many parts of the world.

“Watch out below?” Citigroup Inc.’s William O’Donnell and Edward Acton wrote in a note July 15. They pointed to a technical indicator -- a bearish engulfing candlestick pattern -- as a sign of caution, noting Comex futures had neared the 2019 high of about $3 a pound.

Futures traded 0.7% lower on Thursday, set for a third straight decline.

Societe Generale SA’s global head of commodity research, Michael Haigh, cited overbought conditions in a note, saying copper is “extremely vulnerable to profit taking.”

Comex copper’s 14-day relative strength index had held above 70, which suggests to some traders that an asset is overbought, since late June before dipping below that level on Thursday.

Even its recent bullish move to form a golden cross may not be significant, as the pattern has rarely preceded meaningful trend changes, according to Sundial Capital Research.

“Because copper has done well in recent weeks, sentiment has become very positive,” President Jason Goepfert said in a July 15 note, citing an index of optimism that draws on sentiment measures like surveys and futures data. “The metal has struggled to hold onto further gains when optimism is this high.”

Bolstering bearish sentiment has been easing concerns about South American supplies. The Zaldivar mine’s main union said it was notified by Chilean authorities that owner Antofagasta requested mediation as part of a collective bargaining process. Peru’s operations should be back to full production by the end of July after a two-month shutdown.

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