I just went short copper futures. Here's the rationale:
Fundamentals - it appears that the USA and Europe have entered a recession and Michael Pettis (Chinese economic analyst) is convinced that decoupling won't happen and that over the next few years Chinese industrial growth has too slow down significantly. Of course, China is by far the number one consumer of copper with the USA and Europe trailing behind. I'm hearing enough respectable buzz that China going into a hard landing that makes such a landing seems like a good possibility. Any lightening by China should hit the price of copper hard.
Technicals - See the chart that follows. Also the seasonals (which I don't have time to dig up from a public source) are in favor of a declining price.
Personal Psychology - I'm not overconfident about my copper trading as I haven't done that well at it. I am taking enough time to think about this and get a good entry and have a well-established and well-reasoned stop.
Mass Psychology - The idea that a recession has already started has not grabbed investor mass psychology yet and the idea that China will not decouple and will have a hard landing has also not taken hold. If the price of copper falls further below $4.00 I expect the mass psychology will wake up and drive the price of copper down hard so now seems like a reasonably good entry.
As the chart says, the stop is at daily close above $4.10. Let me know what you think and whether you think my stop is too tight.
The position size is about 10% of portfolio value and the stop is about 3% above current prices so if the stop works out ok I have about .3% of total portfolio value at risk on this trade which seems quite safe. The target price results in a 21% gain so the risk to reward ratio on this trade of 7 to 1 which seems attractive. My 20 times larger gold position more than hedges this trade against a pure inflation / liquidity driven copper price rise.
