Watch the S&P and its 200-day simple moving average … will the west sanction Russian copper next? … our copper trade sits at its own important level

The S&P 500 sits at a critical level.

What happens in the next few days could determine whether stocks continue the rally that began in mid-March or take a leg lower.

It all has to do with whether the S&P’s 200-day simple moving average (SMA) turns into a floor or a ceiling.

***In our March 3rd Digest we profiled “simple moving averages” (SMAs)

We noted that the S&P 500 was approaching a situation in which the 50-day SMA would fall through the 200-day SMA. This is something that technical investors call a “death cross.”

We pointed out that over the last 10 years, every time the 50-day SMA has fallen through the 200-day SMA, the S&P has seen a substantial pullback. The exception is the 2020 bear market, which happened so quickly (while the recovery was equally quick) that these moving averages didn’t cross until the stock market damage was already in the rearview mirror.

A few weeks after that early-March Digest, this death cross occurred. Below is how it looked at the time.

The blue line is the 50-day SMA. You can see it falling beneath the red, 200-day SMA line.

But shortly after this happened, rather than fall further, stocks staged a furious rally.

From March 15th through March 29th, the S&P exploded 11%. The Nasdaq did even better, gaining more than 16%.

This led us to pose a question in the Digest:

So, is this bullishness a genuine trend reversal and the start of sustained gains?

Or is it a head-fake? A fleeting relief rally that will fizzle out as the bears resume control?

What makes the answer difficult is that the recent gains we’ve enjoyed have not been gradual and tested by small pullbacks. It’s just been an explosive, sudden burst north.

It’s easier to feel confident about a true market reversal when you see a gradual bottoming-out process, followed by some small moves north that are tested and hold, followed by a series of higher highs and higher lows.

All we have now is a massive move north. That doesn’t mean this gain can’t hold. It just means it hasn’t been tested yet.

Well, that testing is now happening.

***In recent days, the S&P has fallen and is now dancing around its 200-day SMA

Below, we look at the one-year chart of the S&P 500 overlaid with the same 50- and 200-day SMA lines.

As you can see, the S&P has fallen back to the red, 200-day SMA. In fact, as I write, it’s slightly below it.

If the recent rally is going to continue, we need stocks to turn this 200-day SMA into a springboard.

If that doesn’t happen, and the 200-day becomes a ceiling, we’re likely in for a steeper drop.

So, can we get any clues about which way things will break from the S&P’s RSI?

For newer Digest readers, the Relative Strength Index (RSI) is a momentum indicator measuring overbought or oversold conditions.

When a stock becomes too overbought (or oversold), it usually leads to a price pullback (or a surge). So, where is the S&P’s RSI?

Well, despite recent weakness, its RSI is dead-middle at 50 (the bottom pane of the chart below).

In other words, from a momentum perspective, which direction we head is a coin flip.

If you’re looking to put new money to work, keep an eye on this.

Which direction the S&P breaks could have a major influence on short-term market performance and whatever trade you’re considering.

We’ll keep you updated.

***Meanwhile, copper miners are also trading at a critical level which could determine whether prices pop or fizzle in the coming days

Regular Digest readers know that we’re incredibly bullish on copper’s mega-growth story. Much of our enthusiasm is due to research put together by our macro specialist, Eric Fry, editor of Investment Report.

As Eric has pointed out, we can’t have a green future with amazing new technologies without batteries, which are hugely reliant on copper:

The average EV uses almost half as much copper as the average American house, and EVs aren’t the only “green” products that are “metal hogs.”

• Wind energy uses five to 10 times more copper per unit of electrical energy than does the conventional burning of coal.
• Photovoltaic solar power uses six times more copper per unit of electrical energy.
• A Tesla Model 3 requires 240 pounds of copper, which is nearly four times what a midsized internal combustion vehicle requires.

Therefore, as the renewable energy boom gains momentum, it will produce an echo-boom in demand for key battery metals.

Earlier this year, we highlighted research from Goldman Sachs’ Chief Commodity Strategist, Jeff Currie. He’s on the same page as Eric.

In an interview on CNBC, Currie discussed the huge opportunity in copper:

The metals are the primary beneficiary of this super-cycle… And the reason why is the green cap-ex story.

You have every country in the world pursuing the exact same policies at the exact same time. And there’s no way you’re going to decarbonize the world without copper.

Copper is the strategically most important commodity out there. We like to say “copper is the new oil.”

Inventories are dropping like a brick. Inadequate supply already. And we haven’t even started to decarbonize the world.

Copper is the one that really benefits from that story.

A copper investment that we’ve profiled here in the Digest is COPX. It holds a basket of the world’s top copper miners. As the price of copper rises, it benefits these miners.

Here in 2022, COPX is up 21%. But if we pull back and look at COPX’s two-year chart, we see an interesting dynamic unfolding.

As you can see below, COPX soared coming out of the 2020 pandemic. But after peaking in early 2021, it pulled back and traded sideways for nearly a year.

That was until last month, when it pierced the upper band of its trading channel.

If you look again at the chart, you’ll see COPX is falling, about to test this upper channel band.

Similar to what we highlighted above with the S&P, we’re watching to see if COPX turns this level, which was previously resistance, into support.

If it bounces higher off this level, we’re expected a new bullish surge for COPX.

***A new potential tailwind behind copper

As you’re aware, Russia is on the receiving end of brutal economic sanctions due to its invasion of Ukraine.

In recent days, as news of atrocities in Ukraine emerge, sanctions are expanding. Some are now wondering if they’ll include Russia’s copper market, accounting for 4% of global production.

While 4% might not sound like a lot, in a market that’s already tight, removing 4% of supply would surely impact prices.

Here’s more from The Japan Times, highlighting the interplay between the London Metals Exchange (LME), copper prices, and Russian sanctions:

The LME, which is the ultimate decision-maker, says it won’t take action that goes beyond government sanctions — which, so far, have left most of the metals industry untouched.

But the behind-closed-doors discussions reflect wider angst over whether to keep buying from Russia, as the industry weighs the stigma from the war against its own commercial interests and the fact that vital metals like aluminum and copper were in short supply even before the invasion of Ukraine.

For now, Russian metal is largely still flowing to the world’s factories and building sites. Many traders and fabricators who buy from Russian companies are tied in to pre-existing purchase deals that can extend over years. And commodities merchants have a well-earned reputation as buyers and financiers of last resort when others have long backed away.

Still, a growing number in the industry say they won’t take on new Russian business, and some are actively working to disentangle themselves. That’s making it ever harder for Russia’s metals producers to sell whatever output is not already contracted, and may ultimately force them to cut production if there’s no change by the time long-term deals come to an end…

The question of what happens to Russia’s metal exports is of vast consequence to global markets. It’s a key supplier of palladium, nickel, aluminum, steel and copper.

This is important to watch. But even without sanctions on Russian copper, we’re long-term mega-bulls.

That said, if you’re looking to initiate a copper position today, you might consider watching what happens over the next few days. If the support level doesn’t hold, COPX could continue consolidating. But if it bounces, we’re looking for a strong push north.

We’ll keep you up to speed.

Have a good evening,

Jeff Remsburg