NEW YORK (TheStreet) -- During the third quarter, copper prices are expected to take their cues from China, and the country may provide the next directional shift in demand.

In the medium to long term, copper is expected to touch previous highs, as demand from China and developing Asia remains robust. However, price direction remains extremely volatile, with a downward bias in the short term, marked by new lows for the year.

Technically, resistance lies at $7,100. If that level is broken the next resistance level will be at $8,400. Support for the metal lies at $6,100 and $5,600 during the third quarter.

Fundamentally, demand from China depends upon factors such as announcements concerning the revaluation of the yuan, policy measures to soften the property market and perhaps even another wave of speculative stock buying.

Moreover, the reopening of the arbitrage window, wherein traders can buy the metal on the London Metal Exchange when it's oversold and sell it on the Shanghai Futures Exchange and pocket the difference, may act as a momentary trigger.

Weak Second Quarter

Copper for delivery within three months lost 17% during the second quarter vs. its 7% gain during the first quarter. The fall came despite a 12.3% drop in inventories and a rise in the canceled warrants ratio. Copper retreated from the highs of $8,000 seen in April.

The decline came after China's Central Bank announced a 50-basis-point increase in its reserve requirement ratio to 17%. Moreover, the Purchasing Managers Index (PMI), an indicator of economic activity, declined from 55.7% in April to 53.9% in May and further to 52.1% in June. Lastly, China's GDP growth slowed to 10.3% during the second quarter compared with 11.9% in the previous quarter.

Concerns about the possibility of a double-dip recession due to escalating sovereign debt crisis in Europe and rising jobless and continuing claims in the U.S. led to a further selloff.

China's copper imports declined 28% to 328,230 tonnes in June from 456,240 tonnes in March. On the production front, the country reported 422,000 tonnes in June, up 26% year over year and 6% more than the previous month, according to latest statistics from the National Bureau of Statistics.

Among major copper producers, Anglo American, Xstrata, Kazakhmys and Norilsk reported year-on-year increases in production.

But BHP Billiton ( BHP), Rio Tinto ( RTP), Freeport-McMoRan Copper & Gold ( FCX), and Teck Resources ( TCK) reported declines of 19%, 13%, 11%, and 4%, respectively.

Karvy Global Services (www.karvyglobal.com), a subsidiary of the Karvy group (www.karvy.com), provides specialized research in asset classes including stocks, mutual funds and insurance to leading Wall Street firms.

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