The Copper price slumps on profit-taking, as traders mull China curbs

Summary:

Following yesterday's 4% drop, the copper price is lower overnight, as fears the top consumer will release its strategic reserves continues to worry bulls.

Following yesterday’s 4% drop, the copper price is lower overnight, as fears the top consumer will release its strategic reserves continues to worry bulls.

LME 3-Month Copper is last trading at $9,518.25 down -$38.75 (-0.40%).

In my report earlier this month, I talked about the effect Chinese policy had on the copper price. China has made several attempts recently to calm down runaway commodity prices, including restricting retail traders from speculating on commodity-linked products.

China is the world’s biggest consumer of raw materials, and its economy is battling the highest producer prices in over a decade. Consequently, the country plans to release its state reserves of base metals, including copper, zinc, and aluminum.

The news sent the copper price sharply lower amid a raft of selling as bulls rushed to lock in the profits made during the red metal’s bull run.

Copper surged 37% to $10,746 in the first 6 months of this year. A perfect storm of supply-chain disruptions during the pandemic and a policy-driven demand spike had lifted the price $6,300 from its March 2020 low.

Those conditions created a perfect storm on the way up. But, unfortunately, the additional measures from China and the prospect of central banks slowing asset purchases could have an equal and opposite effect in the short term.

Copper technical outlook

The daily shows the copper price has broken below the 50-day moving average but remains in a bull flag formation.

Of note, a rising trend line from October at $9,300 sits just above the 100 DMA at $9,220.

Therefore, $9,220-$9,300 is a key level for the bulls to watch. A break of this support could start a deeper sell-off to the March low, around $8,650.

That being said, there are other considerations than China. Later today, the FOMC interest rate decision looms.

Traders should pay close attention to Fed Chair Powell’s press conference following the decision for clues on policy adjustments. A mention of tapering could prove very negative for the copper price.

Of course, Copper would benefit if the Fed pledged to stay on the current path and move back above the 50-day moving average at $9,998 could spur an extension above $10k. However, the downside looks more likely at the moment.