Copper prices failed a test of the November rally peak during Monday’s session and are following through to the downside in today’s trading. The contract for March 2017 settlement on the COMEX division of the New York Mercantile Exchange settled the day at $2.610, down 2.27%. A low for the day was established at $2.5890, which corresponds to a 50% retracement of the rebound from the November 15th low.
Several factors suggested copper prices were vulnerable to further weakness in today’s session, one being Monday’s downside reversal. In addition, from November 18th through last Friday’s close, as copper prices moved steadily higher, open interest declined by 5.1%. This implied that money leaving the market drove the advance, rather than new buying. Typically, moves driven by money leaving the market are difficult to sustain.
Finally, a negative divergence has formed between copper prices and the Stochastic, a price momentum indicator. This divergence warns of diminished upside price momentum amid the recent advance relative to the advance earlier in the month.
The combination of falling open interest, a negative divergence with a price momentum indicator and a downside reversal on Monday warned that new buying in anticipation of a breakout to new highs over the near term likely carried a high degree of risk.
With the contract testing the 50% retracement of the recent rebound, the next level to watch on a further move to the downside is the 61.8% retracement of the recent rebound, at $2.5675. A close below this level would increase the probabilities of a complete retracement down to the November 15th low at $2.4350.
This represents an important of level of support for the March contract, as a close below would confirm the formation of a double top reversal pattern, calling for lower copper prices in the weeks ahead.
Should the copper prices manage to stabilize and make a successful breakout to new highs despite the signs of underlying weakness, the target would become the May 2015 rally peak at $2.9465, the next level of resistance on the weekly chart.