Copper’s Seasonal Bottom Likely In $BHP $HG_F

Copper has a tendency to make a major seasonal bottom in December and then a tendency to post major seasonal peaks in May.

This pattern could be due to the build up of inventories by miners and manufacturers as the building construction season begins in late-winter to early-spring. Auto makers are also preparing for the new car model year that often begins in mid- to late-summer. Robust emerging-market growth and a generally weak U.S. dollar over the last decade is also keeping copper’s longer-term trend bullish. Traders can look to go long the May copper contract on or about December 13 and hold until about February 24. In this trade’s 40-year history, it has worked 28 times for a success rate of 70.0%. In the last eleven years, this trade has failed just once; in 2006.

Cumulative profit, based upon a single futures contract excluding commissions and fees, is an impressive $83,000. Nearly one-fourth of that profit came from 2007, as the cyclical boom in the commodity market magnified that seasonal price move. However, this trade has produced other big gains per single contract, such as a $14,475 gain in 2011, and even back in 1973, it registered another substantial $9,475 gain.

The futures contract does have electronic access and there are options on this commodity, but due to the potential volatility and thinness of the market there are better choices available. Let’s consider a stock that mirrors the price moves of copper without excess volatility. The chart below has BHP Billiton (BHP) prices overlaid on copper. This company mines copper, silver, lead, and gold in Australia, Chile, Peru, and the United States. Notice the price correlation to copper. The bottom line on the graph illustrates copper’s average seasonal price moves with seasonal strength highlighted in yellow.

Click image to view full size…

Contributed by Christopher Mistal and Jeffrey Hirsch, Stock Trader’s Almanac

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