Bears Win the Copper Battle

Those of you who have been regular readers of this site know that I have been very strongly concerned over the divergence between what the copper market has been doing and what the rest of the commodity markets, but especially the equity markets, have been doing.

Equities have been making new highs as if there isn't a care in the world while copper has been among one of the worst performing commodities across the entire sector.

As I have said before, and will say again, this divergence is so abnormal, so strange and so uncommon an occurrence, that I believe we ignore it at our own peril.

Copper is the quintessential bellwether for global economic activity because of its widespread use in construction, both residential and business/manufacturing activity. If its price is sinking lower, it is signaling that economic growth is lackluster at best and slowing at worst.

With that in mind, look at what has happened since my last post about this.

Yes, it collapsed right through major chart support. I honestly did not think this would happen ( I thought it would bounce ) but the problems with China have gotten the copper market extremely nervous and it is definitely showing its cards. China has been the poster child for what a credit bubble looks like and we are now finally seeing some real evidence that the air is coming out of that bubble.

I must say that any news showing slowing growth in China, credit issues, rising bad loan problems, etc., is not bullish for commodities. You'll notice that silver opted to follow copper lower instead of gold higher. Gold, by the way, is only keeping afloat in my opinion because of geopolitical uncertainties concerning the situation in Ukraine. It is doing what it should be expected to do however during times when many desire a safe haven of sorts. It also is not hurting gold any that the Dollar has been a consistently poor performer of late.

Along the line of weakness in the commodity sectors, check out crude oil, which has lost more than $5.50/bbl over the last few trading sessions. Does this look like a chart showing a strong demand scenario which would be the case if economic growth were solid?

We thus have two key bellwether commodities both showing us signs of real weakness. I tend to rely more on the signals of these two markets ( plus cotton to a certain extent although weather issues can mess with it) to get a snapshot of where economic growth is more likely to go. We all can dismiss equities as a TRUE snapshot of the real economic picture ( thus it is and has been since late 2008 in my view) as that sector is driven almost entirely by yield-hungry hedge funds and large investment funds chasing yield in a near-zero interest rate environment. As said many times here, you cannot fight the tape as a trader and survive very long but that does not mean that the market will actually make any sense at times.

I see this lack of real growth as problematic for any sustained rallies in gold mainly because of my experience with the metal during the credit meltdown back in the summer of 2008. It got sucked down along with the rest of the commodity sector and did not live up to its name as a safe haven. It was not until the Fed announced their first foray into the realm of gargantuan money printing that the metal bottomed along with nearly everything else on the planet I might add.

The problem we have now is this boogerboo named deflation. It is still around to haunt us. This is not to say the entire commodity sector is going to implode lower. There are definitely exceptions to this at the current time, coffee and hogs currently among them, along with soybeans, which refuse to sharply break lower. Corn and wheat are both higher as well but they are being supported due to fears involving Ukranian grain shipments which many fear are going to be impacted at some point due to the conflict over there.

However, I still remain of the opinion that one of the fundamental pillars to a SUSTAINED bull market in gold is a bull market in commodities in general alongside of a weaker US Dollar and Negative REAL interest rates. It is difficult to make the case for any of the latter points with the exception perhaps of the US Dollar, which while it has not collapsed, certainly is weak on the charts.

That tells me to expect more of a grinding type price action in gold rather than the roaring, runaway moonshot which far too many of those in the perma-bull camp are anticipating. Only if we were to get the moonshot across the entirety of the commodity sector would I be able to concur with that theory.

You'll note on the gold chart that the metal is not falling apart like copper is but continues to lurk just beneath a key chart resistance level. Geopolitical uncertainties are making it tough for the bears to get aggressive and the bulls are not going away. The trend is still higher, but in a grinding sort of fashion as the ADX is moving higher but leveling off suggesting the waning of the sharp momentum seen earlier this year. I get the sense of a market reluctantly moving higher but not one in which there is unbounded bullish enthusiasm.

It will be interesting to see what we get this Friday in the COT report as it will cover the action in gold only through today's trading. Will we see more of that hedge fund short covering the dominant feature or will we see new longs outnumbering the short covering this time around?

By the way, don't forget that the COT report showed copper with all major category of large traders, including the Producer/User/Processor/Merchant  group all heavily short with the only buying being done by the Swap Dealers and Index Funds. I mentioned on Saturday that struck me as being extremely rare and quite odd - now we finally know the reason don't we?

GLD Holdings Higher

Most of you who are regular readers of this site are aware of my view that Western investment demand for gold can be gauged by tracking the reported holdings in the big gold ETF, GLD. While physical demand out of Asia is critical to the well-being of the gold market, I have maintained that without a correspondingly STRONG Western-based demand, gold cannot mount a sustained rally. Asia buying has bottomed or put a floor under the gold market for many years now but it is Western origin speculative demand that has driven gold strongly higher in the past.

That being said, as of the close of trading Friday, reported gold holdings in GLD are at 805.2 tons. While this is up 1.5 tons from the last numbers (which were steady for the previous 8 trading days) it is still down from this year's peak of 806.25 back on February 13. Interestingly enough, the price of gold at the Comex closed at $1300 on that date. From that point on, it has ground higher before hitting a wall near the $1350 level. Yet the tonnage is lower.

What to make of this?

My view is that gold's recent rally has been driven PRIMARILY by short covering ( note - I am not using the word, 'solely' ).

Here is a chart drawn from this week's Commitment of Traders report:

Let's start at the date of maximum hedge fund outright short positions. That occurred the week containing December 3, 2013 where the total number of outright short positions, including futures and options registered at 79,631. As of this Tuesday, that position has been drastically drawn down to where it now stands at 26,321, a reduction of 53,310. On that date, gold closed at $1220.80.

Now let's look at the hedge fund outright long positions. The lowest number of those occurred during the week containing Christmas Eve at 104,754. Since that time, this category has now grown to 144,562 as of this past Tuesday, an increase of 39,808.

Can you see what is taking place? Short covering continues to outnumber the fresh new buying in this market. Until I see some evidence of this changing, I cannot be too optimistic for the possibility of an EXTENDED move higher in gold.

What seems to be happening with the metal right now is that certain events, more specifically, two previous payrolls reports and a geopolitical event, namely, the outbreak of tensions and strife in Ukraine, have spooked the bears into covering shorts.

Until yesterday, Friday, the last two payrolls report, came in much weaker than expected by the market. Those reports immediately fanned the idea that the planned tapering activity by the Fed was going to be put on hold, especially with the dovish Yellen now at the helm. With that came the idea that Fed was also not going to raise short term interest rates any time soon. The result was FALLING longer term interest rates and a corresponding weakness in the US Dollar. With that, money came into gold while shorts covered but it was mainly nervous shorts wanting no part of getting steamrolled by the onset of a new "buy tangibles" wave in anticipation of Dollar weakness.

Throw on top of that the fact that fears of escalation in the Ukranian situation caused a panic run into the metal and once again the bears were given no reason to get aggressive in selling. Quite the contrary, they opted to head for the hills first and ask questions later. What they are now doing is watching to see how events are going to unfold over in that volatile region.

The big mover on Friday (yesterday ) however was not Ukraine, but rather the payrolls report. While not exactly a overwhelming display of healthy job growth, it was better than the previous two reports. Also aiding the report was an upward revision in the prior months of 25,000.

But here is an interesting item in that payrolls report - the number of "not at work" due to "bad weather" was 626,000 compared to 253,000 in February 2013 and 200,00 in February 2012. ( Data courtesy of Dow Jones ).

That shifted the psychology in the market to one of " we told you the poor job numbers were due in large part to the record cold and frigid weather conditions experienced over at least half of the continental United States". In other words, traders are coming around to the view that while the payrolls numbers are certainly not exactly setting any records, they were also not as bad as some were fearing  and that the recent poor showings were weather-related and thus NOT THE START of a new trend.

Now, it remains to be seen what we are going to get in subsequent payrolls reports but it will be very important to closely monitor those reports as the more seasonal weather slowly sets in. If the numbers DO NOT show strong improvement, then traders will re-evaluate their new attitude as of this Friday and shift back to ideas that the tapering plans of the Fed are going to be on hold. If the numbers do show steady, albeit very slow upward growth, then expect the Dollar to garner some support ( it is also sitting right near some very strong chart support ) and US interest rates ( longer term ) to stay firm and creep higher. Remember the Fed has emphatically stated that it is going to be "DATA DEPENDENT" ( their words, not mine ) when it comes to their approach to tapering and to short term interest rates.

This will tend to work against gold, especially if the US equity markets continue to soar to new heights. Now they are talking 1900 in the S&P!

Where this leaves us is simple - from a technical chart perspective, the near term technicals have improved in gold. This is keeping fund computers buying dips and preventing that category from getting aggressive on the short side. As long as any important downside support levels hold firm, gold should remain in a sideways type of pattern as the geopolitical uncertainties with Ukraine prevent bears from getting aggressive. Any sign that events over there are settling down and this market is vulnerable to a wave of long liquidation. On the other hand, if for any reason things flare up further, then gold will see further short covering that might be strong enough to take it up through the cap near the $1,350 region. It would have to clear $1,365 or so to have at least a chance of reaching the psychologically important $1400 level.

Incidentally, before closing this post, I want to note once again the chart of copper.

This chart continues to amaze me to no end - with equities soaring into record territory seemingly every week, copper is sending the exact opposite signal in regards to the health of the overall global economy.

Note the Directional Movement indicator show the bears in solid control of this market. Also, the ADX line is beginning to rise as the price descends indicating the increasing possibility of a trending move LOWER. Note - for that to occur copper would have to close below the $3.00 level in my opinion however. For now, it is in a sideways to lower pattern.

The COT report for copper is also very revealing as it shows a continued build in SHORT positions by the large hedge funds. In addition to that however, what I find EXTREMELY fascinating is the positioning of the other players in the copper market.

The big commercial category consisting of the Producer/Merchant/Processor/End User category is also a LARGE NET SHORT by more than 2:1! The Other Reportables category is also NET SHORT by 2:1 and the small trader, the general public is net short by nearly 6,000 contracts. The entirety of the long side interest in the copper market is being held by only one category of traders and that is the Swap Dealers, some of those no doubt being index funds which are oftentimes lumped into that category for reporting purposes. This is not something which one sees very often. But regardless, the fact that a combination of both commercials and speculators are short copper is astonishing given what is going on in the equity markets. It could be some are looking at credit issues surfacing in China and are bearish as a result.

I said all that to say this - it makes me suspect this commodity sector rally we have been seeing. Some of the individual commodity markets do have strongly bullish supply/demand scenarios and thus their price rise is justifiable but if any of this buying is based on "hyperinflation" fears as some are suggesting, they are way off base because Copper would be leading that charge higher, not attracting the kind of determined selling that it has been getting of late.

Let's continue to watch this closely...

The Friday Job's Curse

Yes, the dreaded curse has struck the yellow metal once again on a payrolls Friday. These volatile numbers are big market movers and today they did so again as the number came in better than expected. Keep in mind that gold has drawn strong buying support from the PREVIOUS TWO reports which their much worse than expected job hirings. Those reports gave rise to the thinking that the Fed, which by its own admission is going to be heavily relying on economic data to determine its approach to the tapering plans, was going to either slow the rate of tapering or cut it altogether.

I mentioned at that time that the weather was having a big impact on the data. The cold was a RECORD and that cannot be ignored as it makes sense that it was going to have at least some impact on those affected by it. Thus, there was a great deal of uncertainty surrounding these numbers. To draw too dogmatic of a conclusion from them was therefore unwise and premature. Even after today's numbers, I still want to see the next month's numbers to see if we are going to get a trend or these reports are just anomalies.

But for RIGHT NOW, those who were leaning heavily on the idea that the payrolls situation was quickly deteriorating and that the Fed was on hold were caught leaning way too hard to one side and got blindsided. The result - a plethora of sell orders from panicked longs.

This is what I meant when I said to be extremely careful if you cannot stop yourself from trading the metal on the Comex right now. It is just so volatile because no one knows for sure exactly what the Fed may or may not do. Everyone is guessing based on their take on the various economic reports. If they get it right - they are heroes; if they get it wrong - they are zeroes.

The mechanics of this are really quite simple - interest rates went back on the Ten Year - that brought some support ( buying support which has been missing of late) into the US Dollar and this derailed the metals.

I am also noting that once again Dr. Copper is getting hammered lower due to credit-related fears out of China. I have been beating that dead horse for some time now but copper has not been confirming the move higher across a large segment of the commodity markets. It is down nearly 4% today alone crashing through chart support in the process. Unless is can stage a quick recovery prior to the close of trading today, it is on course to put in the lowest weekly close since July of last year...

Keep this in mind particularly when you read the silver perma bulls talking about price manipulation. Silver is both a precious metal and an industrial metal and I have rarely seen it moving higher when copper is sinking lower.

More later

The Draghi Party

Early in today's session ECB President Draghi threw the Euro bulls a nice bone to chew on and with that, it was off to the races for that currency with the US Dollar and the Japanese Yen both getting ceremonially dumped.

If that was not enough for the US Dollar, one of the Fed governors, Mr. Dudley, made his way to the microphones to state that the "Fed has a long time before raising short term rates". STRIKE TWO for the DOLLAR.

STRIKE THREE seemed to come in the form of ????. Perhaps it was Dudley's comment about the tapering being data dependent ( recent data has not exactly been resplendent). He did go on to say however that the threshold to change the tapering plans would be "pretty high".

Either way, today was one of those days in which certain commodity sectors were seeing big inflows of hot money. Soybeans continue charging higher with corn getting in on the action. Already there is chatter that the planting season here in the US is going to be delayed on account of the abnormally cold weather ( where is that damned global warming when we really need it?).

Gold garnered support from the surging Euro but was also aided by the vote out of the Crimean Parliament which wants to put to a vote the idea of breaking away from Ukraine and becoming a part of the Russian sphere. Some are viewing this as an escalation in the drama over there and that of course brings a bid into gold.

Like I said the other day, if you have the uncontrollable urge to actually trade the yellow metal at the Comex either lock yourself in vault somewhere away from a computer screen or at least trade small in size. This market is very fickle right now. Just be careful and do not get reckless or listen to all the hype currently coming out of certain segments of the gold community.

I put far more credit on what is happening to the Euro and the Dollar than I do to the ridiculous talk of a nuclear war. If the Euro can clear a strong overhead resistance zone near the 1.39 level while the Dollar CANNOT hold support between 79.50 - 79.00 on the USDX, gold should be able to breach overhead chart resistance near the $1,360 zone. It would have to best $1,375 but if it does, should be able to set up at least a test of psychological resistance at the $1,400 level.

Dip buying has continued to occur in gold with the situation in Ukraine keeping bears nervous but in my mind, the big driver has been the weakness in the Dollar and the continued move higher across certain key commodity markets. Strangely - and I have yet to make any sense out of this - Copper continues to go absolutely NO WHERE. It baffles me to no end to see this key industrial commodity NOT LEADING the sector. Either copper is going to have to make a sudden move higher or I am concerned that we are going to see some big retracements in the commodity sector at some point. There is a lot of hot money flooding into the sector but a great deal of it is purely technical in nature as momentum funds are buying. The problem is that unless there is a strong fundamental underpinning to some of this, once the upside momentum plays itself out, prices could get hit hard as the longs bail out.

The key, at least in my mind, will be whether or not the US Dollar can find its friends again. That is going to take some strong economic data soon. Perhaps it will be a payrolls number but one thing is for sure, the more traders are convinced that the Fed is not going to move on the short term interest rate front any time soon, the more the gigantic specs are going to play their carry trade and shove certain commodity sectors higher.

More later if time permits.... busy, busy week....

Putin Pulls Troops - Bulls Pull Longs

Apologies for the lack of commentary yesterday - a bit busy and worn out from trying to navigate the Ukranian-based volatility.

Watching the price action in gold last evening was an exercise in the difficulties in trading gold, or for that matter, any commodity futures markets, based on geopolitical events. They can be so volatile, so unpredictable, so fluid that those who overload their account with related positions run the very real, and unfortunately, all too frequent risk of having those positions turn against them without the least bit of warning.

The yellow metal dropped rather rudely last evening here in the US ( daytime in Ukraine). Moments later the news showed up on the wire services that Putin had seemed to dismiss the use of military force ( for the moment) in dealing with the situation on the ground in the Crimea region. That sent gold bulls packing faster than one can say: "Oligopoly". Dip buyers did show up later in the session however as the situation is quite fluid.

AS a side note - buying PHYSICAL gold because one has been told that  a nuclear WWIII is just around the corner as some are now claiming (  personally I dismiss this altogether) might make sense to some but for goodness sake, do not go piling into the highly leveraged Gold futures market at the Comex based on those sorts of wild claims. You will inevitably ending up buying at the highs while the market then drops off leaving you stranded and with deep losses.

I have already gone on record in the comments section here but might as well go on record on the "front page" as stating that my suggestion is that the West should stop meddling in Russia's back yard and get behind a national referendum there in Ukraine to split the region into two parts with the Eastern half being given the option to remain under Russia's umbrella while the Western half can drift into the sphere of European influence. My guess is that such a vote would pass. Russia would retain its warm water port on the Black Sea and the Western half could then get bailed out by Germany, who would more than likely be sorry that they adopted it as Ukraine is an economic basket-case. The US itself has NO strategic interest, especially in the Crimea region.

While chart technical levels are important to watch in trading, geopolitical events tend to make buying solely on chart patterns very tricky for the reasons stated above. Let me leave it at that for now. Traders, if you are going to stick your neck out and trade this yellow metal right now, do yourself a favor and stick your mouse hand in a bowl of icy water until it goes numb and you cannot move it. There are better opportunities without the risk of staying awake for endless hours out there.

This is one time when the physical gold buyers can sleep much better. If things happen to escalate and tensions get higher, they have their metal in hand. If things calm down, they still have their metal in hand. Traders on the other hand, can easily end up battered and bruised as no one knows how these events will unfold, contrary to the many confident and reckless predictions that now abound.

Short Covering continues to be the Feature in the Gold market

Gold seems to have run out of gas up near the $1340 level as it has been unable to extend its near month long gains here at the end of February. Upside momentum is waning and that requires close attention.

There are several things that I would like to bring up right now. The first is the nature of the buying that has been driving this market higher since the first of the year. Gold started 2014 near the $1,200 level and has since then put on $140, the largest portion of that this month when it moved $100 higher.

Based on the COT reports since the beginning of this new year, one can easily observe that the largest portion of the buying this year has come from whole scale short covering. Here are the numbers:

At the beginning of the year, the Hedge Fund OUTRIGHT short position consisted of 72,571 futures contracts and options. As of Tuesday this week, that position was 30,996. Doing the math, we can see a reduction of 41,575 short positions or short covering.

That same Hedge Fund category had a OUTRIGHT long position of 106,675 futures contracts and options. Tuesday this week shows a build in that same position to 144,907. The math - an increase of 38,232 positions on the long side.

In other words, short covering by the gigantic hedge fund community has outnumbered the amount of new buying by that same category in the amount of 3343 futures contracts and options since the start of 2014.

This is not a recipe for a sustainable bull market. One wants to see eager, strong, abundant fresh buying driving a market higher because it is a reflection of bullish sentiment, not a wave of aggressive short covering which once it fades, drops the upside momentum. Now, whether we can see something which will spur traders/investors to pile onto the long side with a greater fervor than the short which have been getting out remains to be seen, but until we do, caution is still warranted towards this market. The one thing about rallies led primarily by short covering is that they tend to fade quickly. We'll see what we get to begin the new month.

By the way, as a side note, for you folks over at a certain paid-subscription newsletter site that enjoy taking the articles posted here and republishing them nearly verbatim without giving credit to where you got them, I have not included a chart of the above so that you can at least add something of your own when you indulge your inclination to plagiarize.

Take a look at the chart below however and you can see the extent of the move this year but you can also see the obvious resistance zone that has formed up at $1,340.

The Directional Movement Indicator is showing the ADX line rounding over. It has stopped moving higher which in itself is a warning sign that there exists the potential for a halt in the uptrend. While bulls still remain in control of the market, upward progress is stalling indicated by the falling Positive Directional Movement indicator ( Blue Line ).

Dip buyers have thus far emerged in gold and kept it from breaking down sharply but if the physical market buyers begin to back away and wait for lower prices, I am skeptical that buying from Western-based investment sources will be sufficient take the price through this overhead resistance zone against which it is currently being held in check.

Copper Continues to Fall as Stocks Continue to Soar

Very strange doings occurring in Doctor Copper when one considers the nearly unstoppable surge higher across the US equity markets. One does not generally see copper parting ways with the broader stock market for long as this key bellwether commodity has an excellent track record at predicting ( or at least confirming ) economic strength, not only domestically these days, but globally, especially in regards to China's economy.

Take a look at the following copper chart and notice the sharp drop on the daily chart. Some of today's gap can be attributed to the fact that the March contract has given way to the May as the most active and that is now being plotted on the continuous contract chart; nonetheless, the technicals remain extremely poor for copper - remarkably so given the euphoria around US equities.

Two things stand out - first, copper is trading BELOW both its 50 day and its 200 day moving averages. That is bearish. Secondly - it is sitting right on top of a series of support zones. It tested the first of these today and managed to stay above that zone, but just barely.

Also notice that the Directional Movement Indicator shows the bears currently in control of this market. Negative Directional Movement Indicator ( Red Line ) remains ABOVE the Positive Directional Movement Indicator ( Blue Line ). Also, the ADX is beginning to undergo a slight upturn. It has not managed to climb above the 25 level, much less the 20 level, but it is rising as the market is moving lower indicating the POSSIBILITY of a trending move lower.

If copper were to break chart support indicated above in conjunction with a rising ADX line, it would tend to bode poorly for the overall commodity sector in general, especially those commodities which tend to be good proxies for overall economic activity such as cotton.

Cotton's chart looks decent for now but if it were to drop below 84 simultaneously with an additional move lower in copper, it would not bode well for commodities in general. Obviously there are going to be exceptions to this depending on the specific demand/supply scenario for each commodity market but I am speaking of the sector in general.

I find it particularly disconcerting to see copper moving lower, even as the US Dollar weakens. That has not been a frequent occurrence.

I will try to get some more up on gold later as time permits along with some analysis of the COT data. this has been a busy week in these markets with lots of strange, wild moves occurring and violent whipsaws at times ( the grains come to mind today). I for one am glad to see February come and go and look forward to March trading. While one has to respect the chart action if they are trading, I personally never feel comfortable putting large positions on in any market unless I can understand what is moving it. Some guys like to buy without asking questions based on the technical pattern ( I will too to a certain extent ) but only the brave ( or reckless ) will pile into a market without knowing what in the world is moving it. Reversals in such market come with little to no notice whatsoever and can punish you severely for being so brash and foolish.

Mining Shares Cannot Hold Gains

In what appears to be reminiscent of the not-too-distant past, the mining shares traded hesitantly for the entire session while the broader markets were on a tear higher. Yellen's testimony early in the day seemed to put the precious metals sector on a bullish footing but by the afternoon, prices began to slip with the result that the HUI ended up settling barely above its session low. That is not encouraging especially with the broader market just missing setting yet another all time high ( basis the S&P). It did manage to put in an all-time CLOSING HIGH however.

Here is the chart - a couple of things stand out to me. First, and most importantly, the ADX has turned down indicating that there is at least a temporary halt in what had been the recent uptrending move. Positive Directional Indicator remains above the Negative Directional Indicator meaning that the bulls still have control of the market however.

We will have to monitor the subsequent price action to see at what levels the dip buyers surface. A reasonable place to expect their first appearance would be when/if the index dips towards the 200 day moving average near 231-232. Below that lies the near confluence of the 100 day and 50 day moving averages. That comes in around the 215-217 level on the index. Bulls would not want to see this index fall below that level as it would probably trip the ADX into a negative posture.

There were some very wild moves occurring across several commodity markets today. How much of this is related to end-of-the-month position squaring and how much to actually waning upside momentum but the grains were hit fairly hard today, especially the beans. I definitely want to see the price action across the grains tomorrow as we end this month. AS I said yesterday, maybe the February Break is going to show up here to END the month of February and start the month of March. If so, it is a month overdue.