Another Warning Signal Flashes as Prior Low is Breached

Copper Analysis

Leading Economic Indicator Sends Another Warning

Copper continues the broader downward trend after peaking in early January this year, with the latest intra-day move reflecting bearish market sentiment. Copper is often viewed as a leading economic indicator as it teds to rise in price when the economy is expanding and tends to fall when demand declines, during periods of contraction or economic slowdown. This is because copper is used in the production of anything electrical – which in the modern world encompasses many products/items.

Disappointing Chinese import data and slowing export figures, added to the slow price growth expected in the world’s second largest economy. Many had hoped that the Chinese reopening would be a boon for global markets as pent up demand was thought to have fostered a more optimistic outlook for global trade. However, mixed data has revealed that the reopening momentum appears to be experiencing challenges as even China is not immune to the growth slowdown experienced in much of the developed world.

Additionally, elevated long-term inflation expectations revealed by last Friday’s University of Michigan consumer sentiment survey threaten to entrench inflation in the psyche of consumers, something the Fed is working hard to avoid. Fed speakers today predictably cautioned against a narrative that the Fed may not hike again, reinforcing that restrictive monetary policy is to remain. Given the regional banking crisis, the unresolved US debt ceiling and the fact that the Fed now anticipates a downturn during 2023 – the mood music is understandably more subdued.

Key Levels to Watch for Copper

The current leg lower in copper has traded to a new yearly low, after breaching the 8140 level earlier today. While the bearish continuation gains traction, today’s close will be essential to observe. The intra-day move shows little sign of a pullback but nevertheless, the close provides a more reliable point to work with.

To the downside, should the daily candle close below prior lows, then the 7865 zone of support shifts into focus as the next challenge or objective for copper bears. One particular risk to the bearish outlook is the fact that the market appears oversold via the RSI which means, a pullback is not out of the question. However, a modest pullback can entice copper bears even more if prices grind higher temporarily, providing more attractive entry levels. Resistance (prior support) is at 8188, followed by 8442.

Copper Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX