Emerging Markets & Commodities Under Pressure

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,