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Copper's Convincing Break Higher?

03/31/10 09:27:44 AM
by Donald W. Pendergast, Jr.

Copper has staged a very strong and somewhat unexpected rally after taking a tumble during the first two months of 2010. Is this latest breakout destined to eventually challenge the all-time highs achieved in 2008?

Security:   HG, JJC
Position:   Buy

Commodity markets can be among the most exciting (and dangerous) to trade and invest in, with the copper market being one of the most trendworthy of them all. In this article we'll look at the recent turnaround and subsequent two-stage breakout move that has copper bulls predicting that this may be the start of something big. The daily continuous contract of copper (HG for futures traders; the chart pattern for JJC, the copper exchange traded fund [ETF], is also similar) provides the basis for our daily analysis.

FIGURE 1: HG, DAILY. While the two-stage bullish breakout looks very powerful, until the open interest and large speculator participation figures improve, traders might want to be more cautious, focusing on low-risk intraday setups with more modest profit targets.
Graphic provided by: MetaStock.
Graphic provided by: Rahul Mohindar (RMO) tools from MetaStock v.11.
I don't know about you, but the swift selloff in the copper market that lasted from late January into early February 2010 sure had a lot of long-term metal bulls like me wondering if the final top had already been made in this market, given how violent the move south was. But as markets frequently do, they can surprise us all with the speed with which they suddenly signal a directional change. Such was the case with copper; after reversing in a pronounced V-bottom formation near its 200-day exponential moving average (EMA) on February 5, 2010, the metal wasted little time in reclaiming lost ground. Less than three weeks later, copper had already exceeded and retested its all-important 50-day EMA (blue line on chart) before proceeding into a month-long consolidation pattern that also featured a bullish Chaikin money flow divergence (CMF)(34). See Figure 1.

Next up was a strong breakout from that month-long sideways pattern (see point 1 on chart), followed soon after by a Rahul Mohindar oscillator (RMO) swing buy signal (see gold oval), which was then proved by a convincing break higher above the January 2010 high at 352.35 (point 2 on the chart). That's where copper is now, and the big question is this: Is copper destined to meet or eventually exceed the May 2008 high of 427.00?

Since no one knows the answer to that question, let's look at one final piece of the puzzle, which is the positioning of the various big-money interests in the futures markets, according to the latest CFTC Committment of Traders report. The latest report suggests that the large speculators (hedge funds and deep-pocketed trend-followers) are substantially long this particular market, but not as heavily committed to the long side as they were at the January 2010 highs. In addition, open interest is down noticeably over the past three months as well; taken together, these notable negative divergences may suggest that for copper to meet or exceed the May 2008 highs, it's going to take a whole lot more speculative fervor in order for the lofty heights acheived in the frenzied 2008 copper bull run to be seen anytime soon.

Does this mean that copper's upside is essentially capped here, with limited room to run higher? Not necessarily, but wise market participants might want to focus on trading smaller daily swing moves or even intraday swing moves rather than bet on a major continuation move. Of course, if you're a skilled trend-follower using a proven system and you get a major buy signal here, by all means take your long trade, but make sure that you trust your system completely before attempting to do so. When negative divergences in open interest and large spec enthusiasm appear at the same time as a fresh breakout, it always pays to be extra cautious. Monitor the copper market for solid, low-risk intraday pullbacks to solid intraday support levels (trendlines, floor pivots, and key moving averages like the 21-, 50-, and 200-period EMAs) and perhaps shoot for smaller profit targets for as long as this market may continue to grind higher.

Longer term, if you see the strong resistance area near 368.00 taken out and if the open interest and large spec participation continues to gather steam, you may want to loosen up and go for larger profit targets on intraday or daily setups. It's your call, so choose wisely in this highly volatile niche of the metals market.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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Date: 04/01/10Rank: 5Comment: 

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