Dr Copper is Sick

Dr. Copper is Sick

As with any asset, when the price is higher, there is more demand. When the price is lower, there is less demand. Copper is used in many manufacturing products such as wire, tubing, industrial equipment, and plumbing. When the price is high (demand is high), the world economy is thought to be doing well as manufacturing is usually moving at a solid pace. When the price is low (demand is low), the world economy is thought to be doing poorly as manufacturing most likely has slowed. Hence, the base metal is often referred to as Dr. Copper, in that it gauges the strength of the economy.

If one is to look at a daily chart of the price of copper since mid-2018, its easy to see that the world economy has been fairly steady, albeit steady at a slow pace. Price has generally traded between roughly 2.50 and 3.00 over that time period, with the 200 Day Simple Moving Average around 2.70.

Source: Tradingview, City Index

On a 240-minute chart over the last 2 months, we can see that copper had gone bid into the US-China trade agreement. Price traded from a low of near 2.42 on December 4^th to a high of 2.88 on January 16^th, a day after Phase One of the US-China Trade Deal was signed. However, on January 20^th, as news began so spread of the new Coronavirus, copper began to trade lower. In the days to follow, as new cases began showing up around different cities in China, and then around the world, the decline in the price of copper began to accelerate. People feared (and still do) that the spread of the coronavirus will cause and economic slowdown in China and possibly elsewhere. Copper has given up all its pre-trade agreement gains, and then some (green line). Price and the RSI are currently diverging.

Source: Tradingview, City Index

On a 60-minute timeframe, you can see that selloff from the time of the trade deal signing to current. Notice how strong the divergence is between RSI and price.

Source: Tradingview, City Index

BE CAREFUL, when variables (coronavirus) are entered into price action, one cannot rely on technical alone. If the virus continues to spread copper may continue lower, especially is there are stops built up under 2.50!

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