One of the main markets that benefits from a reflation environment is Copper.
Copper and Crude tend to be the two canaries in a coal mine, as I like to call them, of economic optimism and economic expansion. They’re the two most important commodities to watch in this reflation environment as we tend to see the inflation of goods.
When we take a look at Copper, manufacturing application, we also take a look at Crude Oil. Of course it moves every physical commodity known on Earth.
So again, these are two very important commodities to watch.
We’re gonna focus on Copper right now…
So, Copper which is known as the HG futures contract. The HG futures contract contract is what I’ll initiate any play on Copper in. So, there might be different stocks that have a sympathetic movement to Copper. Those stocks are gonna be known as positively correlated meaning if Copper moves higher, they move higher.
We start off any analysis of companies that benefit from a certain commodity at the commodity level. And Copper has been in an overall uptrend on and off really since May. If you think about May 2020, and how the V bottom was put in and the stock market has exploded higher ever since, you’ll see Copper has been riding shotgun for that entire move.
Is Copper a leader or a laggard?
Well, some people will look at the market that way, that certain commodities will lead the market. Don’t get caught up in that, think more at a macro level]. Looking at, in this case, commodities goods, increasing with inflation, Copper’s gonna benefit.
So if the stock market is up, Copper is gonna be up.
You don’t want to necessarily worry about who went first, you just want to be focused on the fact that they’re moving together.
With that being said, most recently, Copper pulled back into the wave but even broke the wave. Well the reason we took some time to explain the foundation of my bullishness in Copper is because of the research that gives us the confidence and conviction for a trade.
The confidence and conviction for the trade is gonna allow us to be able to hold course even when we see a little bit of volatility. Notice that Copper’s overall uptrend was supported for the most part by the 34 EMA wave. However, in the few occurrences that Copper did break the wave (and there’s probably 3 to 4 different occurrences that it did) I believe 3 out of 4 of those times the 55 Exponential Moving Average held price.
So, the 55 EMA is one of the prop dot settings that I keep on my TOPS layout. I watch that 55, which has been active for most of this rally to the upside and the reason that the 55 becomes support is because it was in the past.
Copper breaks the Wave:
When Copper breaks the wave, rather than making the mistake tactically of getting short, and rather than getting stopped out of a long position or long options in Copper, we’re able to hold on to it.
Now, that’s one trade in Copper where we had to move from 3555 to closing in on 4. That means we’re closing in on a significant 500 tick move. When we take a look at where we sit right now, this move in Copper is approximately a $10000 dollar move from the wave to where it currently sits.
The other thing to consider, which a lot of folks wanna know is, “How do we understand what it’d cost for us to own (to control) one contract of Copper? What’s the initial requirement for something like this?”
Well, it’s about $5000 dollars initial margin…
Now let’s think of it another way…
Because we talked about it before, looking at an underline commodity and then asking “How else can this commodity be played?” Maybe for less than a 5000 commitment of your capital. Well the market that moves the most with Copper is Freeport Mcmoran or FCX.
Much like Freeport Mcmoran, and much like the overall uptrend we’ve seen in overall equities and Copper, they’ve all moved higher together.
You can see here, that except for the pocket around earnings, we had a little bit more volatility. Once again, notice we even have Freeport Mcmoran respecting the 55 period exponential propulsion dot.
We have the overall move higher in Freeport Mcmoran.
Now to buy Freeport Mcmoran in that same area within the wave after the pullback ran about $3.30 cents per call option. This was the March 19 expiration, 26 calls, each one of these cost $330 dollars. Right now, or should I say as of the close on Thursday, February 18th these were worth approximately $8.30 cents.
If the equity markets continue to go higher, these will easily probably reach $8.50 to $9.00.
That is reaching almost a 3X return on an individual call option bought when the market pulled back much the way Copper did.
So that’s an in depth “from soup to nuts” explanation to:
- What moves Copper.
- Why we can have confidence.
- How to look at other levels of support to not get shaken out of an uptrend when that level has shown that it’s dynamic support.
- That connection between equities and Copper, leading us to an alternative (and in many ways) a more affordable way to trade Copper or, in a proxy, in Freeport Mcmoran.
Now this is something that’s been working for many years, and will continue to work for many more. It’s a positive (or sympathetic correlation) between these markets. The equity markets generally risk appetite, Copper which tracks with that, and Freeport Mcmoran which tracks with Copper.
