Trading Nation

One commodity could be sending up a warning flare for investors

Copper could be signaling economic trouble ahead, traders warn

A corner of the commodities market is spiraling, and it could have big implications for stocks and the economy.

Copper prices have tumbled more than 12% since a Jan. 14 high as the coronavirus outbreak worsens and threatens the global economy. Copper is seen as a barometer of broad economic demand given its applications in electrical equipment and manufacturing.

It could get worse for the commodity from here, warns Danielle Shay, trader specialist at Simpler Trading.

"Copper is a very China-sensitive commodity," Shay said on CNBC's "Trading Nation" on Friday. "What we've seen over the course of the past two years really is this downward trend that I personally equate largely to the trade war. But of course, what we've seen over the course the last two weeks is the coronavirus."

In two weeks, copper has fallen to levels not seen since September and was the worst-performing metal last week.

The outbreak is "hitting it even harder because of the uncertainty surrounding it and because of the uncertainty of China's growth. I mean, if we cannot get the coronavirus contained, and China's economy cannot get back on track, this absolutely could end in more of a down spiral," said Shay.

Bill Baruch, president of Blue Line Capital, is preparing for a major move in either direction.

"It has sold off pretty hard … and maybe copper is a little overdone. It's maybe a little oversold. At $2.50, there's a lot of support down here. But I don't know. We could shred through $2.50 and go right down to $2.25. Or we could bounce here — a dead-cat bounce," said Baruch.

Copper was trading at $2.52 a pound on Monday. It is less than 1% from falling below $2.50. A move down to $2.25 represents 11% more downside.

Baruch has a way to trade the metal no matter which way it moves. He's putting on an options strangle — buying the 285 call for May and buying the 225 put for May. These don't expire for 87 days and he's using this time value in his favor by planning to hold for only as much as 35 days. Baruch can exit at any time, and he plans to capitalize upon the next directional move that puts his strike prices in play.