Copper and Markets Trending in Same Direction

"Our greatest glory is not in never falling, but in rising every time we fall." (Confucius, BC 551-479, Chinese Ethical Teacher, Philosopher)

It is said that the economy usually mimics the copper markets, and upon examining the below chart of copper (click to enlarge image), it appears that the economy and copper are trending in the same direction.

Chart provided courtesy of ProphetFinance.com

Copper is now closer to a bottom than a top and hence from this we can infer that the markets are also close to putting in some sort of bottom, if one takes a long term perspective. Copper started putting in a top formation as early as in May of 2007, though the real correction only started to gather steam around July of 2008. It is now giving the first signs of a long term bottom formation, even though in the short term there is a possibility it could momentarily spike down to the 105-110 ranges.

Technical Outlook

The 141-144 ranges provided a very strong zone of support and once this was violated, support turned into resistance. Interestingly enough copper after dipping into the 125 ranges was able to rally above 144 with remarkable ease, indicating that this long term zone of support is probably going to hold on a monthly basis. Without a doubt copper is closer to setting a long term bottom than it is a long term top. From a long term perspective, the current pattern is indicative of a long term bottom, and traders would be wise to start looking into the possibility of taking small bites in some of the key players in this sector. If for some reason copper trades down to the 110 ranges, traders should view this as a long term screaming buy. A close above 160 would significantly diminish the chances of copper trading down to the 110 ranges.

Copper has a tendency of putting in a bottom well in advance of the markets and it usually provides an early signal of a potential change in market direction. During the last strong correction, which lasted from 2000 to early 2003, copper bottomed towards the end of 2002, well in advance of the markets and the general economy. Thus a change of direction in the copper markets could provide the first signs of a turn around in the markets and possibly the economy too.

Fundamental Outlook

With the massive amount of new infrastructure both China and India need to develop in the years to come, not to mention the billions of dollars that are being ear marked by the Obama administration for the maintenance and development of new infrastructure related projects, long term demand for copper is bound to remain robust. Copper has undergone a blistering correction of over 68% in a period of roughly 6 months and we don’t believe that copper is going to trade at such low levels for ever. PCU and FCX are both top players in this sector and traders should consider opening up small positions in them now and use strong pull backs to add to current positions. Do not simply jump in and take one huge bite. Money management and patience are key ingredients to winning in the markets; patient and disciplined individuals are usually handsomely rewarded, while stupid and greedy individuals usually end up gnashing their teeth in pain.

Dollar

As stated before, "if it hits 81, it should mount a relief rally that takes it back to the 83.00 ranges, if not, it will most likely trade all the way down to the 75-78 ranges." (Market Update, December 16, 2008)

After trading as low as 78.77 on the 18^th of December, the dollar has since managed to mount a decent rally. In order for this rally to gather steam, the following conditions need to be met;

1. It cannot close below 78.77
2. It needs to trade above 84 for 3-6 days in a row

If it can fulfil the above two requirements, the dollar will have a very good chance of testing its old highs and possibly putting in a new high before mounting a strong correction that could last till the end of 2009.

A market that has mounted such a strong rally does not simply break down in one shot; the normal course of action is a rapid pull back, followed by a strong upward move (blow off top) and then a more orderly pull back that potentially leads to a series of new all time lows.

The dollar has to stay above 78.70 and rally past 84 to turn the short term trend upward. This whole pattern could take between 3-6 months to complete. Traders who are bullish on the dollar can open up long positions via the ETF UUP (dollar bullish ETF) or short the Euro via DRR, as the Euro usually trades in the opposite direction to the dollar.

We must point out that no matter how strongly the dollar rallies in the upcoming weeks and months, this rally will fail and the dollar will most likely end the year on a lower note; it could conceivably put in a new low before the year is out. Thus traders who are bullish on the dollar should look into closing any and all positions if and when it tests its old highs.

"Man who stand on hill with mouth open will wait long time for roast duck to drop in." (Confucius, BC 551-479, Chinese Ethical Teacher, Philosopher)

Disclosure: Author holds long position in FCX, PCU

Comments

[pelicanpete:]

This analysis is meaningless since he only goes back to 1974 in his comparisons.
So what if we are in a longer-term pattern.

Whoops!

Jan 11 08:34 AM

[Paul Killinger:]

I've read that the price of copper will outpace ALL the metals in future years. We'll see.

Jan 11 09:03 AM

[waldipup:]

"Copper is now closer to a bottom than a top"


Not according to the chart provided.

Copper has always bottomed in the .50's - .60's , something I am aware of without the chart.

And it has always topped in the 1.40 area.

So now that we are down to that 1.40 area , "We are closer to a bottom than a top"?

Why is the historical top area now "the bottom"?

I understand that we have clearly broken above this long term former resistance to higher prices, and so dropping back down to it should provide strong resistance now to lower prices-

But we have no idea if a likely bounce will be met with repeated assaults and an eventual breakdown , or if this will be "the" bottom.

"But that .60 area is no longer valid - it is long in the past , we will never go that low again".

The above is not a current quote -

It is what they said each time in the past that Copper hit the 1.40 top.

We were at .60 in 2002 .

Real Estate prices are back to what they were in 2002 .

Copper cant do the same?

Please understand that I'm not saying it will , or making predictions .

I'm just saying that hitting long time resistance (at what is historically high , peak levels!) doesn't mean we're at "the" bottom -

It just means immediate further downside will be resisted .

The fundamentals will decide if we eventually go lower.

I do not agree with the authors fundamental assessment.

It's just the usual blah blah blah.

How long will the downturn last?

Will Copper still be used in huge amounts?

I'm doing my heating system right now using PLASTIC PEX TUBING instead of Copper - much cheaper and easier.

I do , however , agree with money management , patience , and discipline ,

Investing incrementally in case we are near a bottom ,

Leaving cash for continued investment at lower levels should they occur .

Just remember per "It cant go any lower" that when oil was at 1.40 , all you heard was "it's going to 2 (or higher) , we're running out of oil , it's peak oil , stupid" ,

And then when it dropped instead ,

"We cant go any lower than 1.15 " , then "1" , then ".80" , then .....

You get the picture.

Be wary of those that "know" .

Jan 11 11:07 AM