Emerging Markets & Commodities Under Pressure

Tyler Durden's picture

Submitted by Nic Lenoir of ICAP

At the risk of repeating myself, I hold the view that one of the big risks is China equity market blowing along with other EM and certain commodities like copper. The other day I warned that if we gapped down in Copper we would form an island reversal on local highs after failing against the former support of the bullish channel now resistance, which would have been a MAJOR bear signal. What was interesting is that overnight markets traded down enough and we looked set to gap down, but around 6/7 AM the market caught a bid. It's all the more interesting that it is not just a one day occurrence, the past few days we traded soft in Copper and Gold in Asia and caught a bid in early morning NY time. Given that Asia is one of the huge buyers, it is clearly adding to my concern.

Yesterday Copper posted a shooting star candle and closed below the resistance line afore mentionned after trading above intraday. A close at or below 237.40  would retrace over 50% of Tuesday's bullish candle and would complete a quasi evening star bearish reversal formation (sadly the body of yesterday's and today's candle overlap slightly, but it all depends what exchanges you use and whether you include the electronic session).

Then we look at the Shanghai composite index, and we see we rejected the 50-dma last night after posting a 50-dma/100-dma bearish cross. I had been a bit cautious on the index and debated sending an update on 02/03 as we has posted a bullish reversal on the 61.8% retracement of the rally from September to late November at 2,915. We indeed rallied in February as I suspected (my macro view is bearish, but I don't stand in the face of price action), but last night's reversal tells us tactically the timing is right to re-enter shorts again. We would use a stop above the 50-dma on a daily, and a close below 2,915 clears the way for a move down to at least 2,525. You simply can't pass up on that kind of risk reward!

I did not attach the USDCLP trades to this piece, but it is virtually the same trade. Part of the concerns regarding USDCLP is that a copper squeeze due to supply disruption following the earthquake could put pressure on USDCLP. Remember my buy zone is at 510. I hope I am not too greedy, we saw 513 this AM (original call made when we traded 523). While a close below 498 on a day would be our stop, I think upside it at least 585... again, the risks are very asymmetric here which is why we love the trade.

Regarding the possible disruption of Copper supply what I have read tells me it should not be too bad, but anybody with contrary information is welcome to share. My last point is regarding the correlation of Chinese PMI and Copper. Unfortunately I can't get my chart to include the last PMI, but it was 52, showing that the survey is rolling over (non manufacturing PMI was down a lot as well, below 50!!) which adds to our bearish copper/ conviction.

As always, good luck trading,



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Orly's picture

Dr. Copper knows...

A collapse in the Shanghai Index would definitely be a precursor to a crash related to the S & P 500 Index here in the States.

This should make for a very, very interesting six weeks.  Get ready to get short or get blistered.  Stay nimble.

I still maintain that Soros and company are up to no good with the GBP, not the Euro, as was reported.  (A nostalgia trade for Old George...) If the gambit fails, the fall of the Euro against the Pound Sterling could be quite spectacular.  Already today, there is indicated weakness in the pair.

That is telling me that something big is about to happen.  It could be a couple of days or a couple of weeks.  Either way, it is well on the way...the train has left the station and this locomotive cannot be stopped on a dime.


Anonymous's picture

Interesting thoughts regarding the pound Orly. I suspect the same as you and have been short v usd & eruo most of the month. But we had such a lot of bearish mainstream media coverage here (in the UK) over the weekend that I covered on Monday. Reloaded this morning. The UK economy has become very reliant on three things - `The City` - finance, housing and government. None of them look too clever to me. Our government says it has not entered into any greek style swaps, but they have a huge volume of off ballance sheet funding obligations to the private sector. There is plenty of bad news to come. Frankly I wonder who in their right mind would want to win our forthcoming election.

Anonymous's picture

I like the copper short, but do you think it is too late at 3.3455?

Anonymous's picture

I've been telling you stupid fuckers for some time now that the reflation trade is dead. There are no green shoots. The government's lying to you. We're in a depression. You stupid fuckers will realize soon enough that you shouldn't have drank the kool-aid.

SteveNYC's picture

Dude what the fuck are you talking about? If you're looking for Kool Aid drinkers, you've come to the wrong site. Yes, reflation is dying, no doubt about it. Take a look around you before blasting your mouth off....

nonclaim's picture

One thing is certain:

the ballooning on low volume is here to stay

Down days on real facts will happen but prices will recover out of thin hot air. And unless a real monetary confidence crisis happen this is the new reality. Trade accordingly.

Anonymous's picture

Shanghai-Shmang high.

If the Dems open up a hole wide enough to ram Obamacare through there's your bear catalyst right there.

And you might as well put a cement ceiling right over wherever the S&P 500 is the day before that. That's a technical term.

If Obamacare fails this time, it's gone for a good long while for sure. That doesn't fix our national leverage issues but it doesn't make anything worse and it clears up the visibility a good deal.

Orly's picture

I thought the term was, "concrete roof."

Anonymous's picture

That's a hoagie/grinder/sub kind of thing. Either way Obamacare will be a shit sandwich.

Mr Lennon Hendrix's picture

Prices went up again, inflation is rising.  Supply is mild, demand is strong, money is scarce on the ground level, bankers do not use cash.

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