In this article, we will look at the outlook for two of the most popular commodities to trade crude oil and copper which we think could both have a major correction to the downside. Below find our view of the big fundamentals, sentiment, and the key technical levels of support and resistance.
The Bull Run In Commodities and a Move to Far From Fair Value
If we look at the percentage increase in crude oil since November we have seen prices rise by 48%. In terms of Copper since September, we have seen a price rise of 29% and since it’s low in May last year, it’s up 55%. Commodity prices have moved higher due to the market’s optimism about a quick recovery in the global economy this year but the main reason in recent months has been a weak USD.
Commodities and the Influence of USD Strength & Weakness
A weak USD has seen speculators build up big long positions which have pushed copper and crude oil and many other commodities to far from fair value and we now expect a breakdown and speculators to get taken out on stop.
The USD has started to show some strength and commodities have been unable to break higher in the last few weeks. We expect more strength in the USD and lower commodity prices. Speculators hold their biggest short position in the USD since 2011 and when that extreme unwound the USD rose by 10% quickly and we expect similar price action going forward.
Commodities Speculators and Volatility
Note: For anyone new to trading commodities the big driver in terms of volatility in crude oil and copper is speculators who are responsible for around 70% of all volatility. If speculators were not in the market these commodities would not move in big percentages in the short term because obviously, the outlook for the global economy does not change that much in the short term.
Technical Analysis
Crude Oil after a strong move to the upside we are now trading sideways in a channel and volatility has dropped. We think the buying is exhausted and a breakout to the downside will follow through strongly to the downside.
Copper after a big move to the upside we are now trading sideways on the chart below and view copper as a sell back to first level resistance with stop behind second level or on a break of support with stop behind first level resistance.
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