Bears Maul the Commodity Spreads
On December 29th the blog entered a theoretical long position in the March-February copper(x2)/gold spread at +$25 (premium copper) because it closed back above the ‘even money’ level. The liquidation parameter was triggered today, so the position would have been exited at today’s close of -$8,690, resulting in a loss of -$8,715 per spread.
The meltdown in the copper(x2)/gold spread was triggered by the big break in the Chinese stock market this week. Unless you’ve been living under a rock (or an abandoned copper mine), you know that the bear market in commodities has been driven by the slowdown in Chinese demand. They are some of the biggest consumers in the world.
Testing Historic Lows
This week’s breakdown took the copper(x2)/gold spread just below important price support on the nearest-futures chart at -$8,730 (premium gold). This is serious business. Failure to reverse from here and trigger a Wash & Rinse buy signal could smash the spread into the all-time low from 2009 at -$29,380 (premium gold).
To get any relief, the March-February copper(x2)/gold spread needs to find its footing back above the January 2015 multi-year low of -$5,810. Once it does that, it has a chance to make its way back up to technical resistance between the declining 100-day Moving Average (currently around +$1,060) and the December 30th rally high of +$1,345.
Remember that the rallies into the September and November highs peaked just below the 100-day MA. A two-day close above the 100-day MA for the first time since mid-June would indicate that resistance is broken and the bear market may be over.
Furthermore, the December 30th rally high of +$1,345 was the high for last month. A breakout above last month’s high would alter the bearish price structure on this spread and increase the probabilities of a trend change.
Reentry Trade Strategy:
The blog will make a hypothetical trade to buy two March copper contracts and simultaneously sell one February gold contract if the spread between the value of the sum of two 25,000 lb. copper contracts and the value of one 100 oz. gold contract makes a two-day close above the 100-day MA or a one-day close above the December 30th rally high of +$1,345. Initially, the spread should be liquidated on a two-consecutive day close $500 below the contract low that precedes the entry.