There have been some big technical developments on commodities. Major patterns have triggered and hint to more downside. Copper itself has broken below a range which has been held since April 2021. Is Dr. Copper signaling an impending recession?
Before we jump into this, I want to remind readers that I recently wrote an article titled, “Copper investing for millennials“. For anyone who wants to learn about the fundamentals and why copper is the metal for the future, I highly suggest you read that piece. Or watch my video:
Copper’s ability to predict turning points in economic cycles and gauge the overall health of the global economy is so strong that the base metal has earned the nickname “Dr. Copper” among insiders in the commodities markets.
The reason is simple. To build stuff, you need copper. Think about the copper used in any infrastructure projects. Electrical, industrial and transportation applications. A strong and growing economy tends to have infrastructure being built. Some of you have seen Dr copper in action as we watched copper prices rise due to the growth in China. China was copper hungry, and with 6% growth, they were building a lot of stuff.
For this reason, falling copper prices is viewed as a leading indicator of an impending economic slowdown. And Dr copper is sounding the alarm bell. More specifically a recession. Why should you pay attention? Well copper has entered a bear market before each of the past four recessions!
With copper prices down over 20% from the highs, it meets the criteria of a bear market.
“Copper below $4 per pound, down over 24% from the highs (bear market), and down to a 16-month low tells me that ‘recession’ risks have overtaken ‘inflation’ risks,” David Rosenberg, founder and president of Rosenberg Research & Associates
We currently have a situation where demand for copper is falling which is signaling an economic slowdown. China comes first to mind being one of the largest importers of copper. Yes, China is dealing with lockdowns which is hurting the economy. But I want to remind readers that the People’s Bank of China (PBoC) is still one of the dovish central banks out there. While most of the western world is raising interest rates, the PBoC is actually cutting rates. Some say this could be due to real estate issues, but cutting rates is generally a sign that the economy is contracting and central banks are lowering rates to try and spur the economy.
Over in the US, we are seeing signs of a slowdown coming from retail numbers and employment data. With inflation coming in strong and central banks making borrowing more expensive, the consumer is cutting back on spending. You can see why the markets and analysts are worried about recession.
And we have a big date upcoming this week. July 29th is when we get US Q2 GDP data. If this print comes out weak, then we could meet the criteria for confirming a recession: two consecutive quarters of weak growth. A reminder that US Q1 2022 GDP data came in at -1.5%. If this week’s data print comes in weak, the US will officially be in a recession.
On the technicals, I want to start off on the weekly timeframe. As I said earlier, copper prices have been in a range between $4.00-$4.75 from April 2021-June 2022. Copper broke this range during the week of June 13th. And a major technical breakdown it was!
I love the chart because it shows market structure quite nicely. ALL markets move in three ways: an uptrend, a range, and a downtrend. You can clearly see the uptrend and the range on this chart. Is a downtrend next?
Copper is in a bear market, and this weekly breakdown below $4.00 could accelerate losses. Am I saying an entry right now is the best trade to make? No. Copper prices can pullback to retest the $4.00 zone before drifting downwards.
But for signs of early entry, I would watch the daily chart.
On Friday June 24th 2022, copper printed a large wick candle indicating strong buying. This could be the beginning of a pullback to $4.00. In the coming days, I would watch for this. Copper remains in a downtrend as long as we remain below $4.00. If instead we see evidence of sellers jumping in on pullback days, I would still wait for a break and close below recent candle body lows of $3.70 before entering a short.
Dr copper is giving us signs that an economic contraction is coming. There are other charts that are telling me the same thing, but copper is one I closely follow given its usage in the real economy.