The price of copper is under assault.

The iPath DJ-UBS Copper TR Sub-Idx ETN (NYSE: JJC) is down more than 13% this year, with half that drop coming in the past week. JJC now trades well below its short-term 50-day moving average, as well as its long-term 200-day moving average.

#-ad_banner-#Yet despite the drop in copper prices, I think traders can look at the sector’s slide as a buying opportunity.

Copper is the industrial metal that’s said to have a Ph.D. in economics. In fact, it is sometimes referred to as “Dr. Copper.” This is because the price of copper usually reflects the overall trend in the global economy.

While this “copper indicator” has proven to have a lot of merit over the years, like most economists, copper also gets it wrong — frequently.

Recently, the price of copper is thought to have dropped due to weak economic data out of China. China is the biggest consumer of copper, with the nation accounting for about 40% of global demand.

Certainly, China’s infrastructure buildout has been the biggest driver for the industrial metal during the past decade. And recent data from the Asian giant does show a slump in manufacturing activity.

The latest data showed China’s manufacturing fell to a six-month low in January, as the nation’s official Purchasing Managers’ Index print came in at 50.5, down from 51 in December. Although any number above 50 connotes economic expansion, the recent trend lower has traders concerned.

While these concerns certainly aren’t trivial, they don’t fully explain the decline in copper over the past couple of trading sessions.

My friend, colleague and former commodities trader, Tom Essaye of The 7:00’s Report, explained to me that copper’s recent drop can be explained by sellers reacting to the first domestic bond default ever by a Chinese company.

Last week, we learned that solar equipment producer Chaori Solar missed a $14.7 million interest payment, and in doing so, became the first Chinese company to default on a domestic bond payment.
So what does this have to do with copper prices?

As Tom explained: “As it turns out, copper is actually used as collateral by many Chinese companies that can’t get conventional loans from banks. What happens is they buy copper in the open market, and then pledge the copper as collateral for cash from lenders. When Chaori defaulted, it reminded everyone that we may see more defaults going forward, and if that occurs, a lot of lenders may be selling their copper to raise cash, which could cause copper prices to move substantially lower.”

If Tom is correct here (and he usually is), the decline in copper prices has more to do with to the fear trade than any fundamentals. And as is usually the case on Wall Street, be it in the commodity pits or on the NYSE trading floor, emotion-driven buying and selling that skews prices heavily in either direction tends to rectify itself relatively quickly.

In the case of copper, if the fear over another Chaori-type default proves unwarranted, then getting in on the commodity now, while it trades at multi-year lows, represents tremendous upside opportunity, especially if you are an intrepid trader who doesn’t mind rolling the dice a bit.

Action to Take –>
— Buy JJC at the market price
— Set stop-loss at $32.93, approximately 8% below recent prices
— Set initial price target at $43 for a potential 20% gain in six months

This article was originally published at ProfitableTrading.com:
Capitalize on Copper’s Assault for the Chance at Big Profits

P.S. Copper may be “hated” right now — but that’s often the best time to look for bargains. My colleague Dave Forest recently released a report on another group of “hated” stocks that could be set to break out. To learn more about this opportunity, click here.