Sunday 17 March 2013
The last time we analyzed copper, we were buying at $3.75,
anticipating an upside rally to the $4 area. Next day, we were
stopped out with a few cents loss, and price has dropped recently
to as low as the $3.47 area. Based on the speed of the decline and
the heaviest volume along the way down, copper should drop even
further, or so one might think.
Past history on a chart is important, but the most important part of
all is the present tense developing market activity because it is the
culmination of all previous efforts. We take another look at what the market is saying about where it may be headed.
The ultimate question to always ask is, "Why?" Why did the rally or decline stop here? Why was the range so wide/short? Why was
volume so heavy/light? After the "Why?" question would be "Who?
The latter helps explain the former. As in life, everything in the
markets happens for a reason. Let's see if we can "reason" what
is going on.
Reference is made to the wide range bar down back in September 2012. "EDM" stands for Ease of Downward Movement. This tells us
that sellers are in control and are totally overwhelming buyers who
are getting crushed on the way down. Why did this happen?
If you count back six and seven bars earlier, you see a small retest
failure high of the last failed high in April, and those two bars told
everyone who cared to observe them that the market was now in
the hands of sellers. After those two bars, you next see a three bar
rally. Why were the ranges smaller and on less volume? Because
demand was weak, and that was a poor response to the selling
effort. These clues were in place before the EDM bar in September.
Yes, this is a hindsight analysis, but you need to understand how
markets function because they repeat themselves over and over.
When you understand past behavior, you can better understand
present tense behavior. The opportunity for making a trade, and
preferably one that has an edge, always exists in the present tense.
Long story short, instead of continuing lower after the EDM on
heavy volume, price went sideways. Why? Who were the sellers on
the way down? The public and weak longs. Who were the buyers?
The same ones that started the selling back in April and August.
What you see was a transfer of risk from weak hands into strong.
Controlling influences, aka "smart money," were doing the buying.
The series of boxes show the initial support, then the first resistance, which not so coincidently stopped at the poor 3 day
rally response back in August. Ping-pong back and forth, support
then resistance, the boxes get smaller. Why?
As price moves along the RHS, [Right Hand Side] of any trading
range, including a contracting one, it is getting ready to move
directionally, one way or the other. The forces of supply/demand
are more in balance. Balance leads to imbalance. Would it be helpful
to know in which direction the next move will be? Here, no need to
In between the last two boxes is a wide range bar lower with a poor close, and you can see how it occurred on the heaviest volume.
Why and who are crucial to know. We said the Who sometimes
explains the why. Who was doing the selling, and more importantly,
who was doing the buying?
Who was selling? Once again, the public expecting higher prices,
along with other weak longs who could not financially withstand the decline. Who was buying? Controlling influences, once again. Always remember, patterns repeat, over and over, not always in the same
fashion, but similarly enough to rhyme. From that rhyme comes
Note how abruptly the decline stopped over the last three weeks.
No further downside, and closes have clustered. A clustering of
closes is a pause, just before a market moves lower from the
preceding momentum, OR, the pause can be stopping action to
reverse the activity that has been moving lower.
The market does not always send out invitations to reveal its intent,
but there is a lot of logic in HOW price moves and develops over
time. Maybe a closer look at a daily chart can add to the logic we
attempt to assess?
How a market responds to an obvious move gives important
information. In the weekly chart, we discussed how a three-day
rally was a poor response to a two-day decline, back in August
Applying the logic from the weekly analysis, we can conclude that
the public and other weak-handed longs were selling with abandon
when price cascaded lower with impunity. In just 5 trading days, 3
months of buying effort was erased. Why?
Why? The Who wanted in, but at much lower prices. Note how
heavy the volume was. Compare it to the April 2012 volume when
sellers, [the Who], were selling whatever buyers could stand, just
before price collapsed lower in May. Note the drop in volume. Most
of the smart money has already sold at higher levels. Volume then
picked up again in late May and early June. Why? The you know
Who were back buying in their short positions.
Logic tells us that it was smart money buying on the way down, at
the end of February. Volume decreased in March because almost all of the public and weak longs were spent. The response to the
waterfall decline has been relatively muted. Why? No more sellers.
If there are no more sellers, what is likely to be the next important
move? Demand will be on control, and price will start to rally. The
public, just having been taken to the cleaners will not trust the
rally, or not be able to buy anymore, and price will rise without much resistance.
That is one possibility. The other is, copper is going much lower, and the response is just a pause before that event. Which way?
Answer: we do not have to know in advance. We do not have to
guess, or worse, "predict." Instead, all we need to is let the market declare itself, confirming its next direction. What will that
confirmation be? Ease of Upward Movement, [EUM], on increased
volume, or EDM on increased volume. Once the market declares its
intent, and it will, we just go with the flow.
What would be some clues?
The above daily chart shows total volume. The one below shows
individual contract volume. We look at numbers 1, 2, and 3.
1: Highest volume occurs at the low, and the close is off the low.
We always say the market is the BEST source for information. Here,
the market is telling us smart money is doing the buying based on
the heavy volume. Why? The public does not generate heavy
volume. It reacts to prices by panicking out at the lows, unable to
withstand any more losses or meet margin calls. Logic gives us the
answers to Why and Who.
The location of the close, off the bottom. lets us know buyers were
present, or else the close would have been lower, and maybe even
the range. A decline in volume over the next four TDs tells us selling pressure has abated.
2: Wide range up, strong volume. [Re-read "Answer" paragraph
above last chart]. We see a sign of buying when sellers are
supposedly in control.
3: Note the selling "response" to the buying at "2." After 3 TDs of
effort, price has been unable to break under the low of the wide
range up bar on increased volume. Why[not]?
Logic would suggest that copper is being accumulated here, or price would have dropped lower. An upside reversal from area 3 would be
another important "tell" as to which way copper is likely to move next.
Why, Who, and a little bit of logic takes the "guesswork" out of
which way to go. Waiting for confirmation removes some of the risk
in taking a position, and "prediction" is an unnecessary element in
trading. Can we be wrong? Absolutely. We will take potential trades
like this all day long, knowing the risk is defined and the odds offer
an edge. Some will result in losses, but the winners will more than
Source: The Market.