Be cautious chasing COMEX copper higher with big bears lurking above $5

• A short- squeeze has sent COMEX copper to fresh contract highs
• Despite the bullish headlines, the price action suggests bears with deep pockets are lurking above $5
• With momentum waning, near-term downside risks are growing

COMEX copper surges to fresh highs on short squeeze

The upside in copper flagged last week has played out nicely, delivering a fresh contract high for the red metal on COMEX futures. While I remain a bull longer-term, the price action over the latter parts of this week has not been convincing, warning of growing near-term downside risk.

Bloomberg has written an excellent article explaining the fundamental factors behind copper’s hot streak on COMEX. Basically, a premium had opened up between COMEX futures and futures listed on other exchanges around the world, seeing a cohort of investors short the COMEX contract looking for the premium to be erased.

Unfortunately for them, such was the bullish case for copper from a technical and fundamental perspective, bulls kept buying, eventually forcing the shorts to cover their positions given mounting mark-to-market losses. A short squeeze, in other words. That explains the price action seen earlier this week when COMEX copper surged to contract highs on the back of volumes not seen since November 10, 2016, two days after Donald Trump’s victory in the Presidential Election.

Maybe there was element of geopolitics underpinning the move, coinciding with Joe Biden announcing a raft of tariffs on Chinese manufactured green energy goods on the same day, but it did come across as a good old-fashioned short squeeze.

However, as we’ve seen with squeezes in other commodities such as cocoa recently, often these moves don’t last. And one look at the daily chart of COMEX copper does not fill you with confidence that this episode will be any different.

Big topside wicks on the daily chart warn of downside risks

Just look at the huge topside wicks over the past three session, indicating that bears are winning the battle for near-term supremacy despite huge volumes going through. From a momentum perspective, you can’t help but notice there’s been divergence between RSI and price, with the former recording a lower high even as the latter surged to record contract highs. Combined, it comes across as toppy and prone to snowball-like risks should profit-taking kick in.

Should we see any further moves back towards $5, it presents an opportunity to join with the bears seeking downside, allowing for a tight stop to be placed above the level for protection. Possible downside targets include $4.82 – where the price bounced from on Wednesday – with $4.695 the next after that.

Given the nature of the price action over recent weeks, if you’re contemplating shorting now, ensure you keep your stops close to entry point. The whippy price movements point to this trade being a low probability setup despite the obvious price signals.

-- Written by David Scutt

Follow David on Twitter @scutty