HG Copper looks set for another bearish phase as price breaks support

[MongiIG]

High grade copper looks set for another bearish phase, as risk-off sentiment drives correlated markets lower

Source: Bloomberg

 Joshua Mahony | Senior Market Analyst, London | Publication date: Wednesday 31 August 2022 

Copper reversal in play, as risk-off sentiment hits demand outlook

High grade Copper has been on the turn ever since Jerome Powell’s critical appearance at the Jackson Hole symposium on Friday. Much of the recent strength has come amid a risk-on period for stocks, with fears around the size and length of the global slowdown easing during earnings season. However, with risk assets on the slide, we are seeing a similar response from Copper. Long perceived as a bellweather of the global economic outlook, recent hopes that Chinese stimulus would help lift demand appear to be insufficient to maintain the gains seen over the course of August. Inflation and growth projections in Europe and the US highlight the potential for a particularly tough year ahead, and Dr Copper appears to be reacting negatively to this prognosis. From a correlation perspective, a short in Copper is akin to a bearish view for equity markets and a long dollar position. The chart below highlights exactly that, with the trajectory of HG Copper moving in lock-step with AUDUSD and the Dow.

Source: TradingView

Dr Copper breakdown brings expectations of further weakness

The breakdown we have seen over the course of the past five-months comes off the back of the attempt to break through the 2011 high. While price did manage to temporarily breach resistance, we have ultimately seen sentiment sour to drive HG Copper lower. Last month provided plenty of volatility for the commodity, with price rebounding from the 200-month SMA and 61.8% Fibonacci support level. Nonetheless, the declines we are seeing this month look to continue that decline, as we look forward to a potential sixth consecutive red candle. With the 2008 recession seeing prices fall to $1.274, the recent low of $3.1327 does still look a long way off the levels you might expect in a drawn-out recession.

Source: ProRealTime

On the daily chart, we can see how price has finally broken from its recent recovery phase. The break back down through $3.550 brings the wider bearish trend back into play, with shorts preferred until price breaks up through the $3.782 swing-high.

Source: ProRealTime