Profiting From the Copper Indecision

Price developments change very quickly on commodities markets these days. For instance, copper. In our last update, on August 15, we said, "the technical indicators are still bearish. The previous intermediary support (around 7,850) could be the immediate resistance for the current new rebound. Investors would then be tempted to test the long-term support of the triangle and pull the price back towards 7,200 or 7,100."

Less than one month later, the price has cleared the long-term support line on the downside (that goes through points A and B on the chart). As a result, the bearish sentiment strengthens and will probably drive the price even lower in the coming weeks. The price closed at $6,860 a tonne 2 days ago on the London Metal Exchange (LME).

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What is going on?

Copper has fallen 22 percent from the peak of $8,775 posted on June 30, as increasing stockpiles signalled weaker demand. Imports of copper and copper products by China fell 4% in August compared with July.

Another element that has an impact globally on commodities markets is the recovery of the US Dollar. Remember that despite the exchange being based in London, copper is priced in US Dollars. A rebound of the Greenback therefore reduces the dollar-priced investments.

The price had moved within a long-term indecision triangle pattern. The basis line of this triangle was the long-term support line that backs the bullish trend started in late 2003. It had been tested and validated in February and December 2007 (points A and B on the chart) where the price bounced back strongly.

The upside of the indecision triangle pattern was the resistance line that goes through the highs posted in May 2006, and in March and April this year. This resistance zone was set around $US 8,900.

The last retracement level (61.8%) of the sharp bullish trend occurred between last December and last March (between points B and D). This had been the opportunity for a small rebound (point H) but it failed to cross above the 38.2% level (point K).

Since the beginning of this month, both the 61.8% level and the long-term support have been broken on the downside. This means the negative trend still goes on.

The MACD has just triggered a new bearish signal, and the Momentum indicator and the RSI are also negatively oriented. In this bearish scenario the next important target is the level of the previous long-term low which is the low posted in December last year (point B), around $6,300.

Gabriel Andre
for The Daily Reckoning Australia

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