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312-207-1800(October 26, 1999) METALS: COPPER--As of the writing of this report, December copper is down 0.25 at 81.50.
This past week saw December copper end modestly higher again for the second week in a row. Buy stops were triggered above the 80-cent area basis December. This market had been trading in a range for the last three weeks and now looks poised to move sharply higher. December copper traded above 82 cents for the first time in a month. However, not much has changed in terms of the fundamentals. Warehouse stocks have continued to hold this market back in a technical environment that looks positive. Over the long term, I maintain that the market still has tremendous upside.
Fundamentally speaking, warehouse stocks were only slightly lower with no other market moving news. The same fundamental conditions are present as when the market was trading in the mid-60's earlier this year. Demand is not indicative of higher prices. Although supply is a bit lower, it is still not backing off as much as producers thought it would. The market needs to show the ability to sustain rallies. Until it does, the market will continue to break after sharp rallies occur. Last week, December copper contract gained 2.80 or roughly 3.5% of its value. While there may be some continued buying, this market is still susceptible to market weakness. The only current bearish information is still the large supply of metal on hand in the warehouses.
Looking at the weekly chart, this market may have as much as 30-50 cents of upside potential. Copper prices have historically been much higher and any indications of supply problems may propel copper prices higher. If the stock market firms and the yen stays in the high 90's, the copper market may attempt to take out the 90-cent level.
In terms of actual supply, London Metal Exchange copper warehouse stocks are continuing to dwindle. LME stocks were down 525 metric tons at 778,400 today. This marks 3rd week in a row of lower warehouse stocks. This may be bullish for the short term. However, the warehouses are still showing very high levels of the metal.
Technically speaking, the 82.50 area basis December should offer solid resistance. Major support should lie at the 77.75 level.
RECOMMENDATION--I recommend looking to purchase long call option positions for the March contract. Buy March 84 calls at 5.00 or better.
Matthew White