Copper prices advanced beyond Monday’s high to $2.1230/pound in today’s trading, but failed to sustain the rally attempt and ended the day well off the highs and back within reach of Monday’s low. The contract for December settlement ended the day at $2.1055/pound, down 0.07%.
Losses had decelerated in Monday’s trading, as the contract became heavily oversold due to the 5.3% decline posted in last week’s trading. The overextended market condition combined with test of support defined by the upper boundary of the trading range, which developed in late August and extended into early September, suggested a period of consolidation or rally could develop over the near term. However, today’s failure to sustain the intraday gains and the close near the lows of the session in the presence of an extreme oversold condition is a sign of weakness that implies further downside is likely over the near term.
Market internals in the recent slide in copper have been supportive to the bearish case, as open interest has increased. Specifically, from the October 10th rally high through last Friday’s close, open interest increased 9.7%. This implies that new shorts entering the market drove the sell-off, a negative sign that suggested any near term rebound would likely prove temporary and be followed by further losses. With today’s price action, those losses could play out in tomorrow’s session.
Below the upper boundary of the former trading range now being tested, the next lower support is at the $2.0695-$2.0640 level, defining the August/September reaction lows. Copper prices have already retraced more than 61.8% of the rally from these reaction lows, increasing the probabilities of complete retracement and decline to these lows. On a drop below the August/September lows, the target becomes the June low at $2.0315.
Further weakness in copper would confirm a breakdown from the symmetrical triangle that has developed in copper throughout 2016, as shown on the weekly chart. On a breakdown from the triangle, a downside objective will be derived by measuring the width of the base of the triangle and projecting that distance from the breakdown level. This objective would call for a move below the 2016 low at $1.9710.
Should copper prices make another attempt to move higher, first resistance is now at today’s $2.1230 high. Above this level, the next higher resistance is at the October 6th reaction low at $2.1455, which corresponds to a 38.2% Fibonacci retracement of the decline from the late September rally high. A 50% retracement would lift copper prices up to the $2.1595 level.