Diary of a Financier

Dr. Copper Dropping

In Capital Markets on Thu 2 Jun 2011 at 06:39
  • Copper continues to forge lower, an unfortunate harbinger for the economy & SPX.
  • Every indicator points to a continuation of the Copper bear trend.
  • …so I’m shorting JJC, not just to hedge my exposure to economic conditions, but for absolute return as well.

Remember my entry back in February, when I noted the dip in Copper (HG/1)–in sharp contradiction to the broad S&P 500 (SPX) trend? Well Copper continued to dive in protest year-to-date… and look no further than its preceding the SPX bottoms in 2009 & 2010 for evidence of Copper’s foresight:

HG/1 v ES/1 extended

HG/1 v ES/1

We call it Dr. Copper because it’s a terrific leading indicator for economic conditions. Now that everyone’s coming around to the economic “soft patch” and the QE3 necessity, we have a terrific illustration of that. Notice the slide in Copper’s Open Interest:

HG open interest (blue)

I’m 30% net long equities right now. A 7% long volatility position hedges that, with the balance mostly in bonds, LQD, TLT, and UNG. I’m now prepared to short the Copper ETF (JJC) as an additional measure to hedge my exposure to economic conditions. That’s not a blind hedge, either. Along with its underlying physical Copper it tracks, JJC itself has confirmed a bear trend:

JJC daily extended

As it closed upon support tonight, notice how MFI has been stopped at a 60 resistance with MACD halted at zero. Compounding it all, the stochastic is overbought, and bearish cross will soon occur in the moving averages:

JJC daily

The weekly chart doesn’t extend that far back, but the technical indicators have their footing, and they’re bearish as well. MFI already crashed through support to display the plunge in buyers’ interest; MACD is now testing its own support as momentum has long been lost; Stochastic muddles along the bottom of its trading range:

JJC weekly

Finally, a check of the Fibonacci levels makes me think JJC is retracing its strides back to the January 2009 low:

JJC Fibonacci Levels

–Romeo

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