Copper breakdown provides excellent potential trade but could signal global slowdown

Last week copper broke down out of a multi-month consolidation pattern providing an excellent potential short trade. However, the industrial metal’s bearish move may also signal a slowdown in the global economy.

Copper has been in a triangle consolidation pattern for nearly a year, and as was noted in the 26 February chart of the week article, it is “nearing the end of the pattern and it looks primed for a major breakout.” As the chart below shows, last week copper broke decisively lower taking out the blue support line (circled).

An 18 month (weekly) chart of copper (Click on the chart for a larger version)

An 18 month (weekly) chart of copper (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

What triggered the selloff?

The breaking of technical support was undoubtedly a factor in copper’s sharp fall, however fundamental factors also played a role.

Reports that Cyprus planned to tap bank deposits caused fears that other Eurozone nations might follow suit and led to renewed concerns that the regions sovereign-debt problems are not yet solved. Europe is the world’s second largest consumer of copper, and several weaker than expected economic data points from China, the world’s number one consumer, added to long-running fears about demand for the metal.

A week ago the FT reported that “Unsold copper is piling up in the warehouses of the London Metals Exchange – 514,000 tonnes of the stuff. Inventories have more than doubled in three months, the fastest rise since demand crashed in 2008.”

Whilst equities continue to benefit from all the “easy money” that is being provided by the Fed and other central banks, base metals do not. Instead, they are in tune with economic reality, and growth forecasts continue to be revised down.

Copper has long been seen as a good barometer of global economic conditions, and its recent selloff could signal that a period of slower global growth (or even recession), lies ahead.

How low could copper go?

By measuring the widest point of the triangle pattern (green arrows), it is possible to calculate a potential target for copper. By subtracting 0.68 from a breakout level of 3.50, you arrive at a downside target of $2.82 per pound.

How can traders profit from the decline in copper?

On a short-term chart copper is likely a little oversold, however those looking to capitalize on the potential for ongoing weakness could look to go short via a spread bet with a stop loss set at around $3.47.

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