Copper has stormed out of the gates in June, rallying from 3.07 on May 30th to a 3.3155 intra-day high today for a mind boggling 24.5 cent rally over 6 days.
To put this in perspective, we have measured all copper advances over a 10 trading day interval going back to 2000, and this ranks in the 90th percentile of all 10 trading day rallies - yet it has achieved this in only 6 trading days. So even if Dr Copper took the next 4 days off, he'd still have printed a 90th percentile rally. While this isn't a trigger to short, it does tell us that there is only 1:10 odds of this move exceeding 3.315 over the next week.
Further there are only 2:10 odds of exceeding 3.315 over the next 3 weeks, as this rally scores in the 80th percentile of all 20 day advances. Not odds we prefer to take when betting.
The next point that caught our attention is that Copper has printed this rally in the midst of a developing and clear downtrend over the past 6 months. We use a proprietary 23 week Adaptive channel for measuring trends. It has been slowly rolling over since the 12/24/17 top. Please click here:
www.screencast.com/t/TZwbNSvQ
We then went back and measured every instance where the 23wk Trend was down, while price then closed above this down sloping trend line. This has occurred 43 times since 2005, and the 70th percentile price dispersion 10 days forward is:
Price advanced 4cents, while declining 9.85 cents for odds of 1 to 2.5 in Bears favor. These are odds we like to take when betting.
Conclusion
Copper has seen a extreme rally over the past week, but this has occurred during a developing downtrend. This action smells like technical driven buying and short covering by algos. At minimum, we expect to see some profit taking off this historic move, and given the current technical setup we are being paid 2.5 : 1 to bet short here - An offer we can't refuse. Here is how to trade this.
Short 1 unit Sep18 HG Futures right here @ 3.29
Hedge this with a 49 day 3.29 * 3.50 call Spread which will cost you approx 6.2 cents.
Sell a 3.20 put which will net you approx 5.2 cents.
Total cost of hedge will be 1 cent, while you have upside of 8 cents, for 8:1 Risk/Reward, provided Copper stays below 3.50.
If we are wrong and HG keeps climbing, stop out by covering your short 3.50 call on any close above 3.40. As this is a .70 Delta hedge, you'd loss approx 3.3 cents in that scenario with upside of 8 cents for a still very healthy 2.4:1 R/R.
Alchymist
Our Data Analytics platform was founded upon a very basic premise: If insurance companies can create actuarial tables to assess the statistical probability of maturities, and use that to price risk, then why can't we do the same with Commodity and Futures price movements?
The Alchymist Data Lab provides traders and risk managers access to a expansive cloud based Statistical Database for measuring the probabilities of price distribution. Our data analytics and research help identify uncorrelated, high probability trade opportunities in the Commodities and Futures Markets.
To put this in perspective, we have measured all copper advances over a 10 trading day interval going back to 2000, and this ranks in the 90th percentile of all 10 trading day rallies - yet it has achieved this in only 6 trading days. So even if Dr Copper took the next 4 days off, he'd still have printed a 90th percentile rally. While this isn't a trigger to short, it does tell us that there is only 1:10 odds of this move exceeding 3.315 over the next week.
Further there are only 2:10 odds of exceeding 3.315 over the next 3 weeks, as this rally scores in the 80th percentile of all 20 day advances. Not odds we prefer to take when betting.
The next point that caught our attention is that Copper has printed this rally in the midst of a developing and clear downtrend over the past 6 months. We use a proprietary 23 week Adaptive channel for measuring trends. It has been slowly rolling over since the 12/24/17 top. Please click here:
www.screencast.com/t/TZwbNSvQ
We then went back and measured every instance where the 23wk Trend was down, while price then closed above this down sloping trend line. This has occurred 43 times since 2005, and the 70th percentile price dispersion 10 days forward is:
Price advanced 4cents, while declining 9.85 cents for odds of 1 to 2.5 in Bears favor. These are odds we like to take when betting.
Conclusion
Copper has seen a extreme rally over the past week, but this has occurred during a developing downtrend. This action smells like technical driven buying and short covering by algos. At minimum, we expect to see some profit taking off this historic move, and given the current technical setup we are being paid 2.5 : 1 to bet short here - An offer we can't refuse. Here is how to trade this.
Short 1 unit Sep18 HG Futures right here @ 3.29
Hedge this with a 49 day 3.29 * 3.50 call Spread which will cost you approx 6.2 cents.
Sell a 3.20 put which will net you approx 5.2 cents.
Total cost of hedge will be 1 cent, while you have upside of 8 cents, for 8:1 Risk/Reward, provided Copper stays below 3.50.
If we are wrong and HG keeps climbing, stop out by covering your short 3.50 call on any close above 3.40. As this is a .70 Delta hedge, you'd loss approx 3.3 cents in that scenario with upside of 8 cents for a still very healthy 2.4:1 R/R.
Alchymist
Our Data Analytics platform was founded upon a very basic premise: If insurance companies can create actuarial tables to assess the statistical probability of maturities, and use that to price risk, then why can't we do the same with Commodity and Futures price movements?
The Alchymist Data Lab provides traders and risk managers access to a expansive cloud based Statistical Database for measuring the probabilities of price distribution. Our data analytics and research help identify uncorrelated, high probability trade opportunities in the Commodities and Futures Markets.