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Phelps Dodge -- Wave Five Unfolding?

09/29/04 09:48:42 AM
by Chris Manuell

As a major industrial commodity, copper is linked to the economy and the stock market. As a result, copper producer Phelps Dodge should be able to guide market participants.

Security:   PD
Position:   Hold

Copper is a major industrial commodity and so is linked with the economy and the stock market. Thus, copper producer Phelps Dodge (PD) should be able to provide market participants with a guide through the market. Currently, Phelps Dodge is trading at record highs, recently piercing the March highs at 90.52. Elliott wave analysis on the weekly chart appears to demonstrate that a wave five is unfolding in the pattern that originated from the October 2002 low.

The weekly indicators also support a continuation of the uptrend, with the moving average convergence/divergence (MACD) histogram slope still sloping up as the bulls remain in control and the average directional movement index (ADX) resuming its ascent following its downtrend this year.

Figure 1: Phelps Dodge
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Fibonacci ratios applied to Elliott wave theory allow traders to utilize the proportional relationships between different waves to determine price objectives. In their work THE ELLIOTT WAVE PRINCIPLE, AJ Frost and Robert Prechter outline a range of ratio analysis methods that allow traders to target potential turning points. One such method to determine the length of wave five could be applied to Phelps Dodge. Wave five can be calculated by measuring the distance of wave one to wave three and then multiplying that value by the 0.618 Fibonacci number.

Thus, by subtracting 22.90, the commencement of wave 1 -- from the recent March 90.52 high and end of wave three -- gives us a value of 67.62. Multiply this value by 0.618 gives us a total of 41.79, which is the projected magnitude of wave 5. Given that PD's wave four ended with a low of 59.80, we can estimate a potential turning point with the completion of wave five. This objective is 101.59 and is calculated by adding 41.79 to 59.80.

This potential turning point at 101.59 would allow the trader to remain alert and monitor the price action in that zone. Any valid long-term reversal signals would heighten the chances that the impressive rally in Phelps Dodge may be coming to an end. A reversal may also provide a potent signal for the copper market, and thus, the economy.

Chris Manuell

Chris Manuell spent 7 years as a futures sales/trader for a large investment bank and more recently as a technical analyst for an independent research company. He has a bachelor of economics and graduate diploma in applied finance & investment. Currently enrolled in the CMT program with the MTA.

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Date: 10/01/04Rank: 3Comment: 

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