King Copper

10/19/05 10:59:47 AM

by David Penn

The mother of all 2B bottoms set the stage for copper's incredible cyclical bull market.

Security: HG, HGZ5
Position: N/A

Anybody else waiting for copper to top?

For all the praise rightly bestowed upon the bull markets in gold and crude oil, there may not be another commodity more deserving of bullish devotion than copper. As measured by its futures contracts, copper has been in relentless bull market mode since rallying from a long-term 2B bottom in the autumn of 2001 (Figure 1). Then priced just north of 60 cents a pound, in recent days copper futures closed as high as $1.83 a pound (basis December 2005), an appreciation of approximately 300%.

FIGURE 1: COPPER, AUTUMN 2001. Double bottom or merely 2B bottom, copper futures in autumn 2001 were a tremendous buying opportunity.

Graphic provided by: Prophet Financial, Inc.

One of the best exercises a technician can do is to research past bottoms and tops. By trying to figure out which technical tools, setups, and strategies would have correctly anticipated a given bottom or top, the technical analyst not only gains a deeper understanding of how his or her technical methods work, but also makes it more likely that he or she will accurately anticipate the next bottom or top--using those exact same tools.

In this case, the tool is the 2B bottom popularized by Vic Sperandeo in his book, Trader Vic: Methods Of A Wall Street Master. I've written about the 2B bottom (and top) before for Traders.com Advantage and Working-Money.com--and about similar methodologies such as Larry Connors' "Turtle Soup" and "Turtle Soup Plus One" (see his book Street Smarts, coauthored by Linda Bradford Raschke).

The setup is a basic one that capitalizes on bull and bear traps. Bull and bear traps occur when prices make a higher high (or lower low in the case of a bear trap), yet do not follow through and instead reverse. They are called "traps" because prices initially appear to make a pro-trend move, then swiftly reverse and move in the opposite direction. In the case of major or long-term 2B or Turtle Soup/Turtle Soup Plus One opportunities, that change of direction can mark the beginning of a new major trend.

And just such a new major trend is what took place in copper futures in the autumn of 2001. Copper had been in a bear market since the mid-1990s. After putting in a long-term low in 1999, copper futures rallied, retracing some 38.2% of its previous decline from the 1995 top. At the end of that bounce in 1999, however, copper futures reversed and fell to a test of the 1999 lows over the next two years (Figure 2).

FIGURE 2: COPPER BOUNCE=BEAR TRAP=RETRACEMENT. The bounce in copper that set up the long-term bear trap in 2001 retraced a perfect 38.2% of the decline from the 1995 peak.

Graphic provided by: Prophet Financial, Inc.

But the retest of the 1999 lows proved to be a bear trap because while prices briefly made a lower low in the autumn of 2001 vis-a-vis the lows in the first half of 1999, there was no follow-through. In fact, the same month that had copper futures making the lower low also had those same futures closing several cents higher by month's end. That month, November 2001, also featured a tremendous surge in volume--a confirming sign that a significant low had been made.

Although 2002 was a sideways market for copper, the lows of 2001 and 1999 were never in real danger of being surpassed to the downside. And by the second half of 2003, the copper bull market--the one that is still with us late in 2005--was perfectly primed to explode higher.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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