Trade Idea: JJC (Copper Long) Counter Trend Trade

Copper has been hit really hard with iron ore and a few other commodities that companies in china use for collateral in the shadow banking system, "Commodities for cash". Since the Chaori default the market over there has been nervous, the banks have stopped lending and they've not only cancelled new deals, but put in cash calls on loans which has forced the company's that put up the commodity as collateral to sell it to come up with the cash. However now that we seem to be getting a bounce in China (See my last post FXP) it seems likely Copper will get an oversold bounce as well, it's that whole "Blood in the streets" thing, not so much a fundamental change in China.

I did mention copper earlier this week, specifically Ways to Play China  in which I noted,



"Look at Copper today, it just broke MAJOR support...

You know we don't chase assets, but try to let the trade come to us so right now copper is a no go play on China, however, the same volatility shakeout that is applied to H&S tops is VERY likely going to be seen in copper in which a massive short squeeze will send copper back above former support (now resistance) and that's where we can take a look at copper short as the trade would be coming to us."

It looks to me like we may be in a decent place to play a volatility shakeout/short squeeze being under long term support, it's the perfect place to run a short squeeze and shakeout new and older shorts. Above is the chart I posted on Wednesday and you can see what I envisioned, a short squeeze (yellow arrow) and then a plummet lower (red arrow). The first trade would be the short squeeze, then we'd be set up to look at a copper short after that so two potential trades.

I'm going to enter JJC (copper) long in the trading portfolio, the options liquidity here is very poor as is the volume, but I think it's the best choice out of a what we have to work with.

Here are the charts backing up the trade idea which I will enter at full size in the trading portfolio as soon as I get this posted.

 This is the weekly chart so major support has been broken, this draws in the shorts as they like to enter a trade on confirmation like the break of long term support. Wall Street loves to shake them out.

On a 5-day chart we have a bullish Harami candlestick reversal, or as the Japanese call it, "Mother with baby", but it is a bullish upside reversal and the increased volume makes it at least 2x more likely to be an effective reversal signal as well as putting in a short term capitulation event.

On a daily chart we see there have been a couple attempts at resistance on increased volume, that means the ask stack has been slowly chipped away at and we should be able to break right through that resistance level which will facilitate a short squeeze which is a nice momentum move higher.

The 60 min chart shows a positive divergence at the new low

 As does the 30 min chart and several others so there's enough confirmation for me to trade this as a swing/counter trend trade.

I'd prefer options, but the market is so thing, the bid/ask spread is pretty darn wide.

Here's the 5 min chart, there may be a little more work needed before JJC is ready and with op-ex that may be playing a role, but as an equity long position, i'm not very concerned about it.

I'll be entering a full size trading position and when that breaks above resistance and stars to see distribution, I'll mover out of the long and look for a new short entry as these volatility shakeouts are pretty common in these situation like a newly broken H&S neckline, this is just all the more impressive because of the size of the support level broken and the recent sentiment in Copper which has been horrible, this would definitely be considered a contrary trade.