The bearish nightmare for metals and mining stocks that began in April 2011 may have finally ended.
The chart below shows the excruciating grind lower in metals and mining stocks as tracked by the SPDR S&P Metals and Mining Index ETF (NYSEARCA:XME).
On September 10 , 2012 the closing price of XME poked its head above its downtrend line both on the daily and weekly charts. Is this the beginning of bullish trend reversal or will XME get whacked like one of those mechanical moles in a carnival game and fall back into its dark bearish nightmare?
Developments in the price action of a long forgotten metal leads us to believe that perhaps this breakout in metals and mining stocks may be the real thing.
Copper (NYSEARCA:JJC), or Dr. Copper, as it is referred to by many market pundits for its ability to signal whether the global economy is expanding or contracting, also broke out of a bearish downtrend on September 10.
The headline explanation for the 5.4% pop in the price of Copper this week was the announcement out of China on planned infrastructure spending: China approves US $157-billion infrastructure spending in bid to stem slowdown.
As pointed out in the article, the infrastructure spending in China should increase demand for base materials and metals, hence the pop in metals and mining stocks after the announcement, but perhaps there is more to the bullish breakout in Copper than the China news.
Consider the following: despite the waves of pessimism that wash over the equity markets on a daily basis (the persistent Euro debt crisis, the looming US fiscal cliff, the insidious slowdown of the Chinese economy, and the growing threat of an apocalyptic Israeli/Iranian conflict) the SP500 closed at four-year high this week. The last time the SP500 posted a weekly close higher than 1,437.92 was on December 28, 2007.
What is going on? If things are so bad in the world why are US equity markets trading at four-year highs?
Enter Dr. Copper.
We've noticed that the last two TrendCharts Bullish Buy Signals for Copper have been followed by significant rallies in the SP500.
Our first TrendCharts Bullish Buy Signal for Copper occurred on August 6, 2010 when it closed at $3.34 for the week. The SP500 then proceeded to rally 21.5% from August 6, 2010 (1,121) to April 29, 2011 (1,363).
The second TrendCharts Bullish Buy Signal occurred on January 20, 2012 when Copper closed at $3.64 for the week. The SP500 then rallied 7.0% from January 20, 2012 (1,315) to March 30, 2012 (1,408).
It appears that a bullish breakout in the price of Copper is a rather reliable indicator of future bullish price action in US equity prices.
The pertinent question for traders at the moment is: will this week's bullish breakout in Copper spark a significant rally in US equities, or was the breakout a massive one-week head fake caused by the Chinese infrastructure news?
The price action in Copper over the next two weeks will tell the tale. If Copper can close above $3.50 for the next two weeks and break above $3.70 then we may see a sustainable bullish rally in US equities, similar to the ones that occurred in August 2010 and January 2012; but if Copper fails to close above $3.50 over the next two weeks and dips back below $3.30, this week's bullish breakout will have been a whimsical bullish head fake, the bearish nightmare for metals and mining stocks will resume, and the broader US markets may falter.
We will adhere to our TrendCharts Trade Signals and will be going LONG both XME and JJC at market open on Monday, September 10, 2012. As always, both trades will have Exit Signals to limit the downside risk should the trades move against us.
Disclosure: I am long XME, JJC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.