Wednesday, May 26, 2010
My "copper prediction" from a few months back is starting to come true...
Earlier this year, I made the case for lower copper prices. After suffering a big fall in late 2008, the metal entered an incredible rally... which took it more than 180% from its lows.
This incredible rise drew lots of speculators and hoarders... who built up massive stockpiles of the metal. Storehouses at the central London Metals Exchange were huge. And several mining insiders believe there are a lot of "unreported" stockpiles in China as well.
Just after my bearish essays, the price of copper rallied... and crow was the main dish served at my house for a while. But quietly, in the past few weeks, copper entered a bear market. It violated its 200-day moving average:
A moving average works by collecting a bundle of an asset's closing prices, say each one from the past 200 days, then taking the average of those prices. This produces a chart line that "smoothes" out market volatility so we can gauge the general trend.
When a market is trading above its moving average, it's considered to be in a bull trend. When a market is trading below its moving average, it's considered to be in a bear trend. There's nothing magical about using a 200-day price history to calculate a trend. It's simply a good middle-of-the-road indicator used by much of Wall Street.
What does this mean for commodity traders?
I believe it means "game off" for a while. Commodities tend to boom and bust like crazy. And no matter how great an exploration company or how great a commodity producer is, if its chief product is sinking in price, its share price will sink as well.
This "trend change" is a bearish development for big copper miners like Freeport-McMoRan and Teck Resources (down 20% and 27%, respectively, since my original "avoid copper" essay). If you're still long miners, know that you're now fighting an uphill battle. And if you have a taste for trading, consider going short this boom and bust sector.
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